In a feature on WalletHub, Kogod School of Business professor of finance Octavian Ionici discussed the benefits and drawbacks of a high-yield savings account and what to keep in mind when searching for one.
High-yield savings accounts offer a faster way to grow your savings compared to traditional savings accounts. These types of accounts can be a great option if you are looking to build an emergency fund or save towards other financial goals.
Building financial wealth is essential to reaching personal financial goals such as building an emergency fund, paying off debt, buying a home, going to college, and saving for retirement. High-yield savings accounts are saving instruments for risk-averse investors. They are liquid, FDIC insured for up to $250,000, offer a higher interest rate (usually a variable interest rate) than traditional savings accounts, and are used for building and preserving the emergency fund as a safety net against job loss, car or home repairs, and medical expenses. People saving for future vacations, a wedding, or a down payment on a house may also consider these accounts.
Although high-yield savings accounts have a greater yield, people need to remember that those accounts come with higher monthly maintenance fees, larger minimum deposits, a required monthly or average daily balance, and a limited number of withdrawals per month. Most importantly, in order to protect purchasing power, the yield should be greater than the inflation rate.
For safety reasons, people should only choose financial institutions insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF). The institutions mentioned above offer competitive interest rates in line with the Federal Reserve’s rate decisions, have lower overhead costs, and have the flexibility to pass along the savings to their customers.
Strong domestic demand and labor market tightness could fuel sustained wage pressures that could add to inflation risks. Although the August 4th report from the Bureau of Labor Statistics showed slower employment gains while the unemployment rate dropped to 3.5%, moving slowly to the target of 2%, the Fed might hold interest rates steady until we see sustained disinflation. Because of these reasons, the yield on high-yield savings accounts will still remain at higher levels than the inflation rate for a little bit longer. As always, people should shop around because every week banks offer more attractive savings accounts.
Originally published by John Kiernan on WalletHub.