High-Yield Savings Accounts
A high-yield savings account is a type of account that offers a higher interest rate as compared to a regular savings account. This allows the depositor to earn more money and help their account grow a bit faster. High-yield savings accounts often have certain requirements, such as account balance minimums, and withdrawal restrictions but the benefit of a higher interest rate outweighs the restrictions and limitations.
The interest rates on high-yield savings accounts have varied over the past ten years as the economic landscape of the country has fluctuated. After the 2008 financial crisis, interest rates were generally low but as the economy recovered, rates on high-yield savings accounts began to climb. Between 2011 - 2015, rates averaged 0.85% and rose to an average of 1.20% in 2017. By 2019, rates reached a high of 1.85% before dropping back down to an average of 0.50% during the Covid pandemic of 2020-2021. More recently, high-yield savings account rates have climbed as high as 4.75% - 5.00% for some online banks due to the current economic environment.
Certificates of Deposit(CD)
A Certificate of Deposit(CD) is a type of savings account offered by banks and credit unions that typically pays a higher interest rate than regular savings accounts but may be lower than High-Yield Savings Accounts. When you open a CD, the money is deposited with the bank for a certain amount of money and for a specific amount of time, such as a few months up to several years. In exchange for your funds being locked into a CD, the bank will pay you a higher interest rate, depending on the length of the CD, but the interest rate is fixed and will not change.
One of the main benefits of a CD is that it offers a set interest rate and you know exactly how much the total of the principal and interest will be once it matures. However, if you withdraw your principal before the maturity date, you may forfeit the interest and may have to pay a penalty or even lose some of your principal.
Overall, CDs are a good and relatively safe option for savers looking for a low-risk way to earn a fixed return over a specific period of time. As with anything, it is best to shop around and see what options are available.
Money Market Accounts(MMA)
MMA accounts are accounts offered by banks and credit unions that pay higher interest rates than regular savings accounts but often have higher minimum account balance requirements. MMAs are FDIC insured(or NCUA for credit unions), which means that your savings are protected up to the limits of FDIC and NCUA. Unlike savings accounts, MMAs typically have higher restrictions on withdrawals such as the number of withdrawals per month. They typically also come with debit cards and check-writing privileges, which makes accessing your funds relatively easy. Unlike a CD, there is no fixed term and you may be able to make numerous withdrawals per month, but there may be penalties/fees imposed if transaction limits are exceeded or if the account balance drops below the minimum required by the bank.
Regular Savings Account
A savings account is the most basic type of account offered by financial institutions that is designed to help people save money. It typically offers the lowest interest rate from other accounts but has the fewest restrictions on withdrawals and transactions. The reason the rate tends to be the lowest is because it is designed to be a low-risk, low-reward option.
The biggest benefit to a regular savings account is that it is very easy to use and access. You can make deposits and withdrawals at any time, either in person at a bank or online. Savings accounts don’t typically have many restrictions but it is important to do your homework and make sure you understand the terms and conditions before opening a new account.
Here’s The Deal…
When deciding where to deposit your extra money or money earmarked for savings, there are many options available, you just have to decide the best one for you. Due to the current economic environment, there are many high-yield savings and Money Market accounts that are offering the same interest rates many long-term(3 years and longer) CDs are offering without having to lock up your money for a specific length of time. It is not uncommon for these types of accounts to offer between 3.5% - 5% interest rates. On average most regular savings accounts are still only paying as little as 0.10% interest. Before deciding on which account to use, be sure to read the terms and conditions for each so you know what you can and cannot do with your money once you give it to a bank or credit union.