What’s your APY? - High Yield Savings Account
Annual Percentage Yield, also known as APY, is the annual rate of return you earn on cash in a savings account if you keep the account for the full year. I like to think of APY as almost like free monthly increments of money for simply saving. And I know everyone reading this would love to earn a few extra dollars a month towards their savings goals. This is not to be confused with annual percentage rate (APR) which is the cost of the loan (e.g. fees, interest). APY is one of the main perks associated with a savings account that banks usually offer. But answer this, what is your current APY for your savings account?
According to the FDIC , the national average APY for a savings account is around 0.10%. However, if we are being honest, that really isn’t a good yield as it doesn’t even keep up with inflation. But what if I told you there are savings accounts that we can all use that currently offer 4x the national average. This phenomenon is called a High Yield Savings (HYS) account. A HYS is a savings account that offers higher yields than the traditional bank. Currently, these types of savings are offering APY’s of 1.50% and more. In most cases, these accounts are online and all of them are FDIC insured, so you don’t have to worry about your money not being protected. These online banks are able to offer the higher yields because they don’t have to maintain brick and mortar locations like the Bank of Americas in the world that come with added cost (e.g. rent, electricity).
For visual learners, let’s walk through an example of how much more money you could earn if you used a HYS. For illustration purposes I used the Marcus by Goldman Sachs Savings Calculator which compares their APY of 1.50% to the national average for savings accounts. I used the following data:
Initial Deposit - $200
Recurring deposits - $50
Deposit frequency - Bi-weekly
Savings time line - 1 Year
The results are eye opening! In this particular HYS you would earn $13 in interest while in a regular savings at a typical bank, you would only earn $3. This comes out to roughly a 350% difference in earned interest in a year. I went ahead and attached a screenshot just to show you. Just imagine if you were to deposit more than $50 on a biweekly basis…the interest you earn could be crazy!
A HYS can be used for pretty much any of your savings goals. Your emergency savings, vacation savings, or even the downpayment on your dream home. I personally use it for my emergency savings and wedding savings. Most recently, I closed my savings at a big bank to transfer my vacation savings over to a HYS for the higher interest. I believe anyone that currently has a savings at a financial institution that isn’t earning anything close to 1.50% should stop losing out on free money and start shopping today for a HYS!
As always, I want to hear from you! Do you have a HYS? What savings goals are you using your HYS for?
Holding you accountable,
DWM
(Interest Rate data as of April 2020. Will be periodically updated)