High-Yield Savings and Investing Starter Guide

Most people keep their savings in checking and savings accounts. Traditional banks typically offer interest rates between 0.01% to 0.06% per year. If you have a savings account with $10,000, that will net you $6 for the year, the best offer from the traditional banks.

Online banks typically have higher yields, and savings account offers are typically 4% APY or higher. If you keep your $10,000 savings account in an online bank instead of a traditional bank, you now have $400 to $500 in your account for the year. People are definitely leaving money on the table.

What Makes a High Yield Savings Account Different

High yield savings accounts are different from your traditional savings accounts in a few ways, but are the same in most regards. They have the same account protections, same account structures, but the only difference is the interest the bank is willing to offer.

Traditional brick and mortar banks have very little interest to offer as they don’t have to compete to attract customers. Online banks have less overhead and more interest to offer.

Since online banks tend to offer higher yields, they are a better option when you have them vs. a Certificate of Deposit that locks up your emergency savings for a long time. It is best to keep your emergency savings available when rates are falling as they will impact your savings yield as well.

Using a high yield savings account means $673 more in your pocket versus keeping that money in a major bank account. High yield savings accounts have a huge advantage, but why are they taking so long to catch on?Because they are difficult to obtain? Wrong. Opening a high yield savings account takes 10 to 15 minutes online.

Where to Find Good Rates?

Online savings accounts are the new competition. You can find high yield savings accounts that have competitive rates from Marcus by Goldman Sachs, Ally, Discover, and American Express National Bank. Don’t forget about credit unions or fintech savings accounts, bundled with great competitive rates, like SoFi and Wealthfront.

One thing that NerdWallet has going for them is a beginners guide to high yield savings accounts with the ability to view APY side by side.

Bankrate is a good stop for high yield savings accounts but if you want accounts that have minimum balance information along with high yield savings, take a look at Forbes Advisor.

Credit unions will offer the same protection from your high yield savings account as the NCUA.

What High Yield Savings Accounts Are For

There should be no movement restriction penalty for high yield savings accounts and for that, savings accounts are good for some things and bad for others. The funds you hold in your emergency account, high yield savings accounts are great for. You can also store your high yield savings accounts to fund short term goals like vacations and car purchases.

HYSA shouldn’t be a long-term retirement savings option. Even great interest rates for HYSAs can’t compete over decades of compounding with growth from the right investment options.

CDs and Money Market Accounts

For goals with a defined deadline, especially those hard to save for because of the temptation to spend, a Certificate of Deposit is a great savings option. A CD locks you into a particular savings rate for the defined term.

Withdrawing money before the term ends means paying a penalty, which is a great deterrent for the impulse to spend. If you know you won’t need your savings, but you think interest rates are going to drop in general, a CD locks in a good rate for your term to avoid the worse rate that will come after.

Money market accounts are a little more flexible, with check deposit and debit card access, but are still much like HYSAs. They also have the same FDIC insurance up to the same limit. They are very much worth a look if you expect to need access to the savings before the term is up.

Moving from Saving to Investing

After building your emergency fund, you are probably wondering what to do with extra cash. Generally, most will have a starter emergency fund of $1,000 to $2,000, then maximize what is offered in their employer 401k, then pay off any high-interest debt which sits at 7 to 8 percent or higher, then build their full emergency fund (3 to 6 months of expenses), then focus on maximizing tax-advantaged accounts (IRAs, 401ks), then begin to invest in taxable brokerage accounts.

Types of Investment Accounts

These employer-sponsored 401k and 403b accounts are funded through pre-tax dollars. They help you pay less in taxes in the year you make the contribution. The money grows tax-deferred until you retire. The employer match is crucial, and anything less than the full match is essentially giving away a portion of your paycheck.

Traditional IRAs are opened and funded individually, and the contribution can be a deductible expense based on your income. The tax on the money’s growth will also be paid at withdrawal.

Roth IRAs have a similar structure, but tax treatment is inverted. You are contributing to the account using dollars that have already been taxed. As the money grows tax free, when you meet the requirements for withdrawal, the distribution will also be tax free. There are set income limits.

Taxable brokerage accounts are completely accessible with no contribution limits, but there are no tax advantages. Capital gains tax apply to sales that are profitable. They should be used after tax-advantaged accounts are maxed.

What People Actually Invest In

Index funds are un-managed funds that contain all the securities of an index, as opposed to funds that pick “winning” securities. They have the lowest fees of any fund. Compounding that difference over 20 to 30 years, Broad index funds charge 0.03 to 0.10 percent while funds that are actively managed charge 0.5 to 1.5 percent.

Funds that are traded like stocks are called ETFs. The small differences between an index fund and an ETF matter very little to long term investors. Both are heavily used.

Bonds are good for long term investing since they are lower volatility, lower long term returns, and a good stabilizing fund that should increase in allocation closer to retirement.

Time Horizon Changes Everything

People are typically very concerned that money invested will be lost forever, but you should really look at when you need that money to determine which vehicles you should be investing in. The longer you have to invest money the more you’re able to ride out downturns in the market. Saving accounts can’t provide the same returns as investing.

A more conservative investing approach has you reserving more of your money. For shorter time frames, this means putting your money into savings accounts or CDs. Medium time frames means adding a blend of stocks and bonds. For money that won’t be touched for decades, a heavy stock allocation is best.

Savings accounts are an easy way for most people to invest better. You should see what your savings account is earning and compare that with better options that are available.

If there’s a big enough gap, moving your money to a new account likely is faster than any other errand you have. It’s easily a good first step.