How to Choose the Best High-Yield Savings Account

A savings account is a type of bank account distinctly different from checking or investment accounts. Savings accounts are designed to store money that you don't need immediate access to. In this article, we'll explore the various types of savings accounts available.

Types of Savings Accounts:

1. Traditional Savings Accounts:

Found in most banks, they offer modest interest rates and are highly secure. Traditional savings accounts at major national or regional banks provide robust branch and ATM access along with personal advisors. However, they tend to pay extremely low interest, with average rates under 0.10%. Expect possible maintenance fees if you don’t meet minimum balance rules. These can erode savings, though students and seniors may qualify for exemptions.

Pros:

  • Easy access and high liquidity.

  • No market fluctuation risks.

  • No annual deposit limits.

  • Option to create "buckets" for different savings goals.

Cons:

  • Low interest rates.

  • No tax benefits.

2. High-Yield Savings Accounts:

In contrast to traditional savings, high-yield savings accounts pay exponentially higher interest thanks to rates 2-10x higher. For example, Axos Bank High Yield Savings has a current APY of up to 0.61%. The accounts are FDIC insured up to $250,000 and offered by online banks or fintech firms like Marcus, Axos, and Ally.

Pros:

  • Higher interest earnings due to higher APYs.

  • Safe investment option with low risk.

  • FDIC insurance up to $250,000.

  • Easy access to funds.

Cons:

  • Transfers and withdrawals may be limited.

Potential underperformance compared to high-return investments.

  • Some banks might charge fees.

3. Online Savings Accounts:

Online savings from disruptive fintech providers optimize around top-tier interest rates and an entirely digital experience. Average APYs hover between 2-4% - much higher versus old-school banks. For example, Barclays Online Savings now pays 3.00% APY on all balance tiers. Perks include low fees, smooth mobile apps, and innovative features like automatic savings triggers. Just be prepared for fully self-service banking without physical bank branches.

Pros:

  • Higher interest rates.

  • Lower fees.

  • Convenient digital access.

  • Often innovative banking features.

Cons:

  • No personal interaction.

  • Dependence on technology.

  • Possibly limited services.

4. Health Savings Accounts (HSAs):

Pre-tax savings for medical expenses. Useful for those enrolled in high-deductible insurance plans needing to cover out-of-pocket health costs tax-free.

Pros:

  • Tax-free contributions.

  • Tax-free withdrawals for medical expenses.

  • Funds roll over each year.

Cons:

  • Contribution limits.

  • Restricted to high-deductible health plan enrollees.

5. Individual Retirement Accounts (IRAs):

Tax-advantaged savings accounts for retirement, not tied to employers, ideal for the self-employed, especially beneficial for gig workers and small business owners not offered workplace 401(k)s.

Pros:

  • Tax advantages (deferred or tax-free withdrawals).

  • Steady interest.

  • Flexible contribution options.

Cons:

  • Penalty for early withdrawal.

  • Annual contribution limits.

  • Vanguard or Charles Schwab IRAs.

Factors to Consider When Choosing a Savings Account:

  • Interest Rates: The higher the interest rate, the faster your money grows. Compare rates across various types of accounts.

  • Fees: Look out for maintenance fees, withdrawal fees, etc. Choose accounts where such fees are minimal or avoidable.

  • Accessibility: Consider how easily you can access your funds. Online access, ATM availability, and mobile banking are key.

  • Minimum Balance Requirements: Some accounts require a minimum balance. Understand these requirements to avoid fees or account closure.

  • Comparing Savings Accounts: Use online comparison tools to assess different savings accounts. Focus on interest rates, fees, accessibility, and customer reviews. Always read the fine print to understand the terms and conditions fully.

  • Safety and Security: Ensure that your savings account is FDIC insured, guaranteeing your money up to $250,000. Look for banks with robust online and mobile banking security features.

Common Mistakes to Avoid:

Increase your savings effortlessly by setting up automatic transfers from your checking to your savings account. Utilize round-up features and integrate your savings account with budgeting apps to track and enhance your savings. Avoid pitfalls like neglecting account fees or choosing an account with unrealistic balance requirements. Be mindful of how these factors can impact your savings goals.

Conclusion:

Each type of savings account has its unique advantages and drawbacks, making them suitable for different financial needs and goals. Traditional and high-yield savings accounts are more general-purpose, while online savings accounts offer tech-savvy convenience, and specialized accounts like HSAs and IRAs cater to specific needs like healthcare expenses and retirement planning. Selecting the right savings account is a fundamental step in financial planning. Start early, consider your needs, and choose wisely to ensure your savings grow healthily.