Should You Have A High Yield Savings Account?

Increases in inflation and the corresponding rise in short-term interest rates have dominated the economic news. It makes sense because the rise in the cost of gas and groceries affects us all. In addition, increasing interest rates have been driving up the cost of new mortgages, potentially slowing the growth of the real estate market.

Conversely, one positive effect of the rise of interest rates is the increase in interest payments on low-risk instruments. Prior to 2022, you had to look beyond traditional bank accounts at brick-and-mortar banks to get a rate of interest higher than .5%. News that Apple has rolled out a high yield savings product has alerted many banking customers that earning interest well over 1% is possible.

Not a new concept

The term high-yield savings account is not new. The ability to earn more than the industry average has been there for some time. I started to notice local credit unions and online banks (banks without large branch networks) advertise higher than average rates on accounts like savings accounts and CDs over a decade ago. These products filled a niche in the savings and investment market for those wanting to save short-term money with some type of insurance backing but wanted to earn more than the industry average.

Why can they pay so much more?

The generally accepted reason online banks can offer higher interest rates on savings is the fact they lack the expense of owning/leasing and staffing a large branch network. This allows them to pass the savings on to their customers. I would also think that the fact their users are actively seeking better rate products keeps them focused on competing to deliver their best rate.

Is a high yield savings account right for me?

If you are looking for a place to earn some interest over the course of several months up to 2-3 years, the high yield savings account has been a popular choice. When rates were almost at zero, it was not unusual to see high savings accounts out earn more restrictive products like certificates of deposit (CDs). Keep in mind that savings accounts will often limit your number of withdrawals because they are not meant to function as a checking account. A high yield savings is not likely to beat inflation so if your goal is longer than 5 years, you may want to consider other options.

Where can I find higher yield savings?

Long before Apple
AAPL
made its announcement about getting into the high yield savings space, dozens of banks had already been competing. Before you search online, reach out to your existing bank or credit union regarding their rates. While you may have a savings product with them, they may be offering a better rate if you bring additional cash over or if you warn them you are thinking of moving your savings elsewhere. Sites like Depositaccounts.com and Bankrate.com have been around for years and can be a decent place to shop and compare. Just know that the rank and order of products listed on those sites may be a function of what the bank may have paid in terms of marketing and ad dollars to appear there.

Read the fine print.

Before placing your savings with any institution, it is important to know the details. You will want to verify they are covered by the FDIC. Also, you want to know if the rate they are offering is simply a teaser (meaning the bank only offers this for a limited time) or if the rate continues to seek to be competitive even if rates continue to go up. You will also want to know the restrictions on withdrawals and what if any fees you will incur for transferring funds. For instance, some banks require you to pay wire fees if you do not have other banking products with them.

Should you integrate high yield savings into your bank account mix? In general, it is better to earn interest than not. Just keep in mind the fine print on the account you choose to make sure your additional interest is not swallowed up by fees. Also, there are alternative ways to save like money market accounts and certificates of deposit that offer similar interest rates. If you like the potential to earn higher than average savings rates with the flexibility of a savings account along with the backing of the FDIC, this is something well worth considering.