A high yield savings account is a savings account that earns a higher interest rate than the regular APY (annual percentage yield) on a typical savings account.

What are the pros and cons of a high yield savings account?

Pros High yield accounts help you build your money faster due to carrying a higher interest rate. The annual percentage yield is greater on a high-interest savings account compared to a general savings account. Let’s look at an example of $10,000.00 saved for one year. The average savings account has a .05% APY. Then we will compare it to a high yield account with a .45% APY. In this example, the general savings account would acquire $5.00 in interest for the year. Yet, under the high yield savings certificate, you make $45.00 interest over the year. So, looking at these numbers, it will take you approximately nine years to earn the same amount of interest from a regular savings account that maintains a lower interest rate.

If you left your money in the high interest savings account for those same nine years, you would have earned $405.00 in interest. Additionally, this does not include your compound interest over those nine years. Using our model, it is remarkably apparent how a high APY makes reaching a savings goal easier and faster.

Cons – The possible largest disadvantage of a high yield account is restrictions on the account activity. The savings certificates have rules that prohibit deposits and withdrawals from the account during the certificate term-making your money hard to get. The account holder will incur a fee if early access to your money is necessary. Thus, for the certificates and IRA accounts to not incur fees, they tie up your money until the term ends, or in the case of the IRA, you reach the designated age. Tying up your cash is risky if you don’t have a small savings set aside for day-to-day transactions and finances.

Secondly, the initial deposit for opening certificates and a money market account is sometimes a substantial amount of money, ranging from $500 to $2,500.00. Also, you fail to earn dividends with a money market account if you do not uphold the minimum account balance.
The most common known drawback to a high yield savings account is the early withdrawal penalty. IRA accounts and saving certificates come with an early withdrawal penalty. The money market account offers a bit more flexibility without such an early withdrawal penalty. Still, it doesn’t yield as high of a savings account rate.

Finally, Money FCU further cautions you to look closely when shopping around for a high yield savings account. Some banks or credit unions also have fees. Some high-interest accounts come with a monthly maintenance fee that eats into your savings potential. Money FCU is proud to announce we do not apply such maintenance fees to our accounts.

Thinking it through. High yield or traditional savings account.

To determine if a high yield savings account is right for you:

  1. Look at your budget and savings.
  2. Determine the amount you would like to put into the account and the amount of time you feel comfortable restricting your cash.
  3. See if you have the funds to put down the minimum opening deposit required.
  4. Weigh out the likelihood of fees that you can incur against the amount of possible gain to determine the amount of risk you’re taking.

A good way to review your risk factor is to look at your monthly expenses. Need help with a budget? Take a look at our Making a Budget blog. Compare it to what is currently in your savings minus either the minimum opening deposit for a certificate or the minimum account balance to earn dividends with the money market account. View the overage to decide if that number is suitable for your lifestyle.

Can you withdraw money from a high yield savings account?

Yes, with the Money FCU Money Market Account, you may make deposits and withdrawals as you need to without restrictions. However, you need to maintain the financial institution’s minimum balance requirement; otherwise, you’ll fail to yield dividends for that time. Remember that although you can make withdrawals, it’s best to keep your high yield savings account building in order to get the most out of the possible dividends earned.

Keep monthly finances separate to avoid hassle with monthly expenses and purchases taking you under the minimum balance. We recommend holding an additional general savings account that does not have a minimum balance requirement. Accordingly, you’ll be able to keep the high yield savings account withdrawals to emergencies only.

What are CDs? Certificate of Deposit.

CDs (Certificate of Deposit) are funds insured in a high yield savings account. A CD pays a higher APY (annual percentage yield) than a typical savings or money market account. The account requires that the funds remain in the account for the contracted amount of time. CDs at Money FCU range from 3 months to 60 months per the preferences of the customers. The longer you’re willing to allow the credit union to hold your money in the account, the better the percentage yield you’ll receive. Terms under three years will automatically renew when the term period ends. Anything over a three-year term will automatically transfer to your general savings account. At which time you may choose to open another certificate or move your money elsewhere.

Money FCU has its high yield savings account rates online throughout the year and shows the different term periods for each rate.

Do you pay taxes on a high yield savings account?

All money earned in a savings account is taxable income by the IRS. Some IRA accounts have tax benefits. Customers must report the interest on their tax returns. Investopedia explains what is taxable and why. In general, the IRS will tax all investment income, including interest earned with a bank. The percentage of tax is dependent on your tax bracket.

Things to watch out for with a new high yield savings account.

Watch for banks that have a high monthly maintenance fee eating into your savings. Note: Money FCU does not have maintenance fees on these accounts.

Also, look for unnecessary bank fees for being over transaction limits. Understand what transactions count as penalties, such as money transfers, withdrawals, deposits, online banking transactions, mobile banking, use of the ATM, debit card, and direct deposit. Most credit unions will have some banking transactions included. So, know which ones count against you and what comes free with the account.

Do your research ahead of time. Be sure the initial deposit fits your budget and that the minimum balance is manageable in your current finances.

Discern if the term length fits your lifestyle. Don’t overextend yourself and take the risk of incurring a fee for taking money out too soon or for not maintaining the minimum balance.

Finally, in case of unexpected debt, account for the holding period per your term agreement. Meaning, the savings term period in which you do not freely have access to your funds without penalty.

Are you ready to begin earning a high APY?

High yield accounts are great for packing away money for an emergency fund. A high yield savings account earns more for the money you’re saving. They are equally helpful in saving up money for a large home project, a wedding, or a large down payment on a new home or business investment.

So, whatever you’re saving up for, let’s get you to that comfortable savings spot faster. Reach the savings goal even quicker by setting up a recurring direct deposit to a Money Market savings account.

Money FCU is happy to help you achieve your savings goal. Begin using a money market high yield savings account or our savings certificates and watch your money grow. See what banking with Money FCU really has to offer.