Savings vs High Yield Savings

For many of us thinking of ways on how to spend our money as soon as we get it is probably the first thing that comes to mind. For others, saving it is more important. However, by choosing to save our hard-earned money we come across another question: where should we keep it for safekeeping? Sure, a savings account at your local bank is a good start. But what if you could save it in a bank that pays you a percentage 100 times greater, if not more, than what your local brick and mortar bank ? In this post, we will be introducing you to High Yield Savings account.

What is a High-Yield Savings Account?

A high-yield savings account (HYS) is a savings account that pays a higher interest than your standard savings account for every dollar in your account. Besides paying a higher interest, they are usually by an online bank.

Why choose a HYS?

As explained above, a HYS account pays a higher interest than your average bank. This is important because after some time, this interest can increase your savings by a significant amount. Below is a scenario that may help you see the difference in interest gained when comparing both types of savings accounts.

Let's say you have saved $25,000 and are no longer happy about keeping your money stored in your sock drawer because of the value it loses due to inflation. So you are thinking of putting it in a bank but don't know if to put it in a regular savings or HYS.

After doing some research, you find that Bank A pays .015% annual interest and Bank B pays 1.5% annual interest. Let's assume that each bank compounds the balance annually. So how does this difference in interest affect your savings after one year? See below:

Bank A: $25,000 x .015 = $375.00
Bank B: $25,000 x .0015 = $3.75

So after one year, Bank A will pay you $375 for having your money in their bank account compared to Bank B who will pay you $3.75 for the same amount of funds.

As you can see, a High-Yield Savings account is a better choice when it comes to saving your money in a bank. Of course, just remember that because most of these banks are online, you will still need a regular checking account to deposit and withdraw funds. On top of that, any interest earned over $10 will cause a 1099-INT form to be mailed to you at the end of the year. This form will be discussed on a different post. All in all, if you have savings available and are not ready to invest them in the stock market but would like to keep it as an emergency fund, then a HYS may be the right choice for you.