High-yield savings accounts can help your money grow faster than traditional savings accounts, but many people mistakenly believe that the returns these types of accounts can generate are too good to be true.
“They have the misconception that it’s illegal,” Colby Dixon, a wealth management advisor at Northwestern Mutual, tells CNBC Make It.
Never fear, they are. Like traditional savings accounts, high-yield savings accounts are backed by… Federal Deposit Insurance CorporationIt is an independent US government agency. With FDIC-insured banks, up to $250,000 of your deposits are covered if the bank fails.
There is a direct reason why these accounts are able to offer higher rates. Online banks that offer high-yield savings accounts tend to have lower overhead costs than traditional banks, because they don’t pay for physical locations and other expenses.
Here’s a look at how the numbers have changed: The average annual return for a traditional savings account is just 0.46% as of October 16. According to the Federal Deposit Insurance Corporation (FDIC).. This means that after a year, a $1,000 deposit would earn $4.60 in interest.
But high-yield savings accounts offer APYs of up to 5% or 6%. After a year, the same $1,000 deposit will earn $50 in interest at an interest rate of 5%.
“High-yield savings accounts pay 10 times what the average savings account pays, so the extra interest boosts your balance and itself earns interest from that point on,” Greg McBride, chief financial analyst at Bankrate, tells CNBC Make It.
But before moving your money, be sure to do your research on the bank that offers the high-yield savings account you’re interested in. Make sure it’s FDIC insured and check to see if there are any account fees or minimum balances you want. You will need to keep avoiding fees.
The bottom line is that high-yield savings accounts can be a safe and effective way to help your money grow faster than if it were simply housed in a regular savings account.
“There are plenty of high-yield accounts available no matter where you live in the U.S. or how little you have in savings,” McBride says. “You’re just moving your savings to a place where they will be welcomed with open arms and higher returns.”
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