I opened a high-yield savings account at a separate bank to earn up to 200 times more on my money, and I liked it even more than I expected
- When I was saving money to buy a home a few years ago, I opened a high-yield savings account to earn more interest on my money without risking it in investments.
- I liked that my high-yield savings account helped my savings grow, and that keeping it in a separate bank made it less tempting to use for impulse purchases.
- I didn't love that it took a few days for my savings transfers to go through, and that I was taxed on my earnings - but I found the downsides paled next to the advantages.
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A couple years ago, I was thinking about purchasing a home. Eventually, my savings became substantial enough that I opened a high-yield savings account. I wasn't earning much on my traditional savings, and I wanted to up my APY so my money would grow faster.
I no longer have the same immediate financial goals, but at the time, the pros of opening a high-yield savings account far outweighed the cons.
A high APY isn't the only thing that matters in a savings account
At the time I opened my high-yield savings account, one of the best offerings on the market was from Barclays. My savings account started out earning 1.00% APY, but interest rates on high-yield savings accounts have gone up in the subsequent years. Today, that same account pays 2.10% APY, and it's not even the best on the market anymore. Currently, the highest savings account on the market - Wealthfront's cash account - offers 2.57% APY.
Traditional savings accounts pay as little as .01% interest, meaning a high-yield account that pays 2% interest earns 200 times more than the traditional account.
But APY isn't the only thing you should consider when shopping for a high-yield savings account. You will also want to look out for monthly maintenance fees, which could eat away at the APY you're earning, and no minimum balance or deposit requirements. There are currently plenty of options for no-fee, no-minimum accounts available.
I liked that my money grew steadily
Earning a higher APY was my primary goal when I was saving for a home. I had a certain number I had to hit in order to afford the down payment and closing costs, and a higher APY would get me there faster.
For example, on a $10,000 balance, if I had never put another penny in, my Barclays account was earning $100.46/year. With the newer, higher APY of 2.10%, the same account today would earn $212.13. That's hundreds of dollars simply for keeping your money in a competitive savings account.
Another advantage of keeping my money in a high-yield savings account at a financial institution that was not my day-to-day bank was that when I felt compelled to make an impulse purchase, it was more difficult to access my funds. Because I had to transfer the money to a checking account outside of Barclays, the transfer could sometimes take as long as a few days.
My money was not immediately accessible even though it was in a savings account, and that helped me curb my spending.
I didn't really mind the downsides
To be honest, I didn't experience too many cons with my high-yield savings account.
I was careful to keep my emergency fund in a savings account attached to my regularly utilized checking account so that if I needed a new tire or had to cover an emergency medical bill, I'd be able to access the money. I only kept my house savings in the separate, high-yield savings account.
If I had not, I would have been in a frustrating position when that tire blew. I would technically have the money to replace it, but it wouldn't be in the right account to make it immediately spendable.
The final thing to remember with any savings account, but especially high-yield options, is that you are likely to receive a 1099-INT from your financial institution come tax season. That means you will be charged income tax on the interest your savings account earned throughout the year. This isn't a bad thing; it's always better to earn more money and then be taxed on it rather than earn less money in a vainglorious attempt to avoid taxes.
I'm planning on opening another high-yield savings account
My life circumstances have changed over the past years, and I have put the goal of owning a home on the back burner. However, as my financial objectives shift and change, I will undoubtedly reach a point where putting a higher percentage of my income into liquid savings helps me reach my goals.
At that point, I plan on opening a high-yield savings account again. I don't mind an extra 1099, and being rewarded with a higher APY in exchange for the accessibility of funds in moments of temptation is just too sweet a deal to pass by.
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