Building a personal savings is a crucial element of financial planning and there are many ways to save your money. You can take the “under-the-mattress” approach and keep your money within arm’s reach, but if you’re like most people, you probably have a savings account with your local bank. And if you’re smart, you have a high-interest savings account to grow your funds to their full potential.
By depositing your cash in a savings account, you’re essentially giving the bank permission to use your funds. In exchange, the bank gives you a certain percentage on your money in interest.
A savings account is a great way to save money for a rainy day, a down payment on a house or your child’s college education. But if you’re looking for a high return on your money, a traditional bank savings account isn’t the answer. You need a high-interest savings account, also known as a high yield savings account.
All savings accounts pay a percentage of interest, but high-interest savings accounts have some of the best interest rates that are higher than traditional savings accounts. The average interest rate on a traditional bank savings account is currently about .03% to .05% a year. On the other hand, you can earn as much as 3% a year with a high interest rate savings account. Deposit $10,000 in a high interest savings account and you can earn $300 a year in interest. Plus, you’ll earn interest on your interest. The longer you keep the money in the account, the more interest you receive.
There isn’t just one option for a high-yield savings account, but several ways to grow your money.
1. Money Market Accounts.
These savings accounts offer higher interest rates than traditional bank savings accounts, and they’re the perfect option if you’re looking for a long-term savings strategy. Unfortunately, these types of savings accounts have a high minimum balance requirement, such as $1,000, $10,000 or even $25,000. Plus, the bank limits your number of withdrawals each month.
2. Certificates of Deposit.
This savings alternative lets you deposit a specific dollar amount with a financial institution for a certain period of time — typically three months to five years. The bank issues a certificate as evidence of your deposit and you earn a fixed percentage of interest on your money. As a high interest rate savings account, certificates of deposit can grow your money in a relatively short period.
3. Online Savings Accounts.
Online banks have less overhead and costs, thus they can afford to offer high interest savings account rates. ING Direct and HSBC Direct are reputable online banks that offer higher rates on savings accounts, but these aren’t the only options. When opening an account with any online bank, do your research to confirm the legitimacy of the financial institution. After opening an account, you can transfer funds directly from your traditional savings or checking account to your online savings account. It takes a few business days to complete a transfer.
Don’t choose a random bank for your savings. Getting a high interest rate savings account involves research. Start with your personal bank and ask about high yield savings account alternatives. Fully understand your options and work with a personal banker to determine the best savings vehicle for your goals.
Next, go online and check savings account rates with multiple online banks — at least three or four. Not only should you compare rates, but also services and other fees. Lastly, check online customer reviews before opening an online savings account. This is the best way to learn whether an online bank has poor customer service, unfair practices or deceptive tactics.