Matthew Goldberg | (TNS) Bankrate.com
It feels good to know your money is in the local bank. But with the Federal Reserve raising rates and traditional banks offering much lower yields than online banks, this comfort could be costing you. Generally, FDIC online banks offer savings accounts with higher annual percentage yields (APYs) than traditional banks.
What is the meaning of APY?
APY stands for “annual percentage yield” and refers to the rate of return a bank account earns in a year. APY includes the effects of compound interest, which means interest is earned on both your principal and the accumulated interest.
APYs on checking and savings accounts can change, meaning the bank can raise or lower them, as they want. Generally, banks with high-yielding accounts will increase APYs when the Federal Reserve raises rates, and lower APYs when the Fed decreases rates.
How a low APY can impact your savings
Imagine you have saved $10,000. That’s great, but if it's earning the national average of 0.58% APY, you’re not getting the best return on your savings. Some big banks pay even less, at 0.01%.
There are many opportunities to earn a much better rate of around 5% APY or higher.
An account with $10,000 that pays 0.58% APY earns about $58 of interest in a year. In a high-yield savings account or money market account paying 5% APY, you’d earn around slightly more than $500 in a year. And if you continue to add to your balance, you’ll earn more from compounding interest over time.
These calculations assume that the APY will stay the same for a year — which is unlikely to happen — and that you’re not withdrawing or adding any money.
Let’s say your balance isn’t quite as high as $10,000. These days, banks offer high-yield savings accounts paying up to around 5.25% APY with minimum balance requirements as low as $0. And while the earnings won’t differ as much on low balances, you can continue adding to your balance over time to maximize the higher yield.
With Bankrate’s compound interest calculator, you can see approximately how much interest you’re missing if you have a low-APY account.
What is the best place to put your savings?
Your high-yield savings account is a great place for short-term savings goals and your emergency fund. Unlike most certificates of deposit (CDs), savings accounts allow easy access to your money, as needed, without charging a penalty. To find the best high-interest rate for you, browse Bankrate’s list of the best high-yield savings accounts.
You can have multiple savings accounts if you’d like to have separate places to store money for different goals. Or consider tools like Ally Bank’s buckets feature that lets you allocate money in your savings account to specific goals, such as a wedding fund and a home down payment fund.
Should you let your money sit in savings?
Experts recommend keeping your emergency fund in a high-yield savings account as well as money for short-term goals such as a home down payment or vacation. Short-term financial goals should be things you plan to accomplish within three years. Beyond that, the money may be better off in an account where it can have the chance to make a higher profit, such as a investment account.
High-yield savings accounts are excellent for emergency funds and short-term savings goals because the money is protected by FDIC — as long as you follow the FDIC’s rules and guidelines — and you can still earn a decent return on your money. Before you choose a savings account, confirm that it is FDIC-insured so you know your money is safe.
(Bankrate senior writer Karen Bennett contributed to an update of this story.)
(Visit Bankrate online at bankrate.com.)
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