The Risks and Rewards of High Yield Savings Accounts

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The words “high yield” or “high interest” sound great when it comes to savings. Who doesn’t want to earn more money? But there’s more to it than just the rate of return when it comes to our financial accounts.

Checking and savings accounts are fairly easy concepts to understand. We use our checking account to hold the money we earn and spend to pay bills, and complete other financial transactions. We use savings accounts to, well, save money. Some checking accounts, such as our Cashback Rewards Checking, do allow you to earn money back on transactions, which is a nice bonus. But sometimes it’s a smart financial decision to park some money in an account and let it accrue interest for you.

What you might not realize is the average interest rate on a traditional savings account is relatively low compared to other types of interest-earning accounts geared toward saving rather than transacting.

For example, a traditional savings account like Citadel’s Star Savings account can earn from 0.05 to 0.10% APY (the annual percentage yield or the real rate of return on an investment), while a High Yield Savings (HYS) account can have rates around 3%. Seems like a big difference, and it can be, depending on your specific financial situation and needs.

Before you decide where to put your savings, let’s look at the risks and rewards of high yield savings accounts.

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1. Higher Rates vs. Rates That Fluctuate

If the interest rate on a traditional savings accounts is .06%, you earn 6 cents per year on every $100 in the account. With an APY of 3.25%, that same $100 earns $3.25 in a high yield savings account, and with a minimum balance of $10,000 to earn interest, you earn $325 per year. And that’s just on your initial deposit. If you make monthly contributions to your account, you’ll earn even more.

These interest rates are influenced by the Federal Reserve and fluctuate based on how well the economy is doing. Since the Fed has been raising rates on a regular basis throughout this past year, interest rates are also going up as well. That’s not the best news for interest rates on things like credit cards, but it does mean rates on the money you’re able to save is higher too.

2. Small, Steady Gains vs. Potentially Large Windfalls

When you deposit your money in a high yield savings account at Citadel, that money is safe and secure, insured for up to $250,000 per individual depositor. It doesn’t disappear if the market crashes or an investment goes belly-up. The interest rate can never be negative, making this a no-risk, passive income investment. Once you earn interest, it doesn’t ever leave your account until you withdraw it.

However, even with the higher interest rates you’re earning on the account, it’s clearly not as lucrative as investing. According to Nerdwallet, the average stock market return is about 10% per year for nearly the last century, as measured by the S&P 500 index. That’s more than three times the current APY on our high yield savings account.

In some years, the market returns more than that, and in other years it returns less. And that’s an “average” – often the market can be much higher, meaning you could miss out on opportunities for significant growth. Of course, when the rate of return goes very low, that growth is far less substantial.

Overall, the stock market and other investments are meant for long-term commitments that allow you to ride out the volatility in the market and doesn’t make for easy access to your cash should you need it quickly.

3. Earning Interest vs. Unlimited Access

A high yield savings account is a great option for creating an emergency fund. Financial experts typically recommend having three to six months' worth of living expenses on hand. By keeping that money in an account separate from your every day checking account, you’ll be less likely to use it and it will be there for you when you need it.

Since you don’t need the money right away, it can earn you more in interest. When you do need it, you’ll have cash on hand to pay for those unexpected expenses. Instead of putting a pricey car repair or medical procedure on a high interest rate credit card, you can withdraw the cash or transfer it to your checking account. You’ve earned interest on the money and you can avoid paying interest rates of 15-17% (or more!). Being able to cover the cost up front may also secure you a discount.

Tip: If you have a surplus of cash sitting in a checking account, it may not be earning interest. If you’re well over the balance you need to maintain a functional checking account and cover day-to-day transactions, moving those extra funds into a high yield savings account can provide a monthly interest payment you wouldn't otherwise earn.

A high yield savings account can also be a good vehicle for putting aside cash for a short-term financial goal such as purchasing a new car or funding a kitchen renovation. You may not be ready to jump into the purchase right now, but you want to have the money available when the time is right. Putting the money into a high yield savings account can make sure that money, and a little extra, is available.

For example, if you had a $10,000 emergency fund and transferred it into a high yield savings account with 3% interest, compounding daily for five years, you'd earn about $1,618 in interest alone. Leave it for 10 years, and that $10,000 would grow to around $13,498. In a traditional savings account earning .05% interest, that same $10,000 would have only gained $50.82 over 10 years.

Of course, the high yield savings account doesn’t provide unlimited access the same way a checking or even a regular savings account does. In order to qualify for the higher interest rate, the account does require a minimum deposit, and at Citadel, you can make one withdrawal or transfer per calendar quarter. Additional withdrawals or transfers are assessed a $25 fee. Additional fees may also apply.

4. Online-Only Banking vs. Physical Locations

Due to their low overhead costs, online-only banks can usually offer higher interest rates on accounts such as high yield savings that brick and mortar financial institutions often can’t match. However, Citadel has physical retail locations throughout Bucks, Chester, Delaware, Lancaster, and Montgomery counties. We’re able to offer great rates on high yield savings accounts, along with convenient locations and friendly, knowledgeable staff. And if you prefer to do your banking online, we have that covered too!

5. Making a Decision

When it comes to making sound financial decisions, having a traditional savings account, apart from a checking account you use to cover everyday transactions, should be your baseline. It’s easily accessible money should you need it. It’s there to help you save money, but it doesn’t do much more than that.

A high yield savings can be the next step in your financial journey. Once you hit a greater amount of savings, moving some of it into an account that earns more interest can help your money do more for you. The interest rates, even though they fluctuate, are higher and compound faster, and grow your balance.

But these accounts should be viewed as a a middle ground, a safe place to put your cash for emergency funds and near-term goals. They’re not intended to be long term investments that help you increase your wealth. A certified financial professional can help you determine the right mix of accounts and investments to both cover your day-to-day needs, your short term savings goals, and your long term investment and retirement goals.

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