If you’ve seen the interest rate on your savings account drop in the last year, you’re not alone. The US Federal Reserve (aka the country’s central bank) cut interest rates to near zero at the start of the COVID-19 outbreak, where they have remained for much of 2021. That’s a great news for people applying for (and refinancing) mortgages, but bad news for anyone trying to boost their savings.
That could soon change. Most members of the Federal Open Market Committee, which is part of the Fed, expect the agency to raise interest rates three times in 2022 to fight inflation. If that happens, “we expect high-yield savings account rates to follow,” says Alvin Carlos, managing partner at District Capital Management.
Translation? Savers will again begin to see returns on their investment – if they know where to put it.
Saving money now gives you new opportunities in the future.
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What is a High Yield Savings Account?
A high-yield savings account offers a higher rate of return, or annual percentage yield (APY), than a traditional savings account.
Even in the current low interest rate environment, banks are offering APYs close to 0.50% for these types of accounts, which eclipses the national average for a traditional savings account (0.06%) .
Before the pandemic, it was not uncommon to find a high-yield savings account paying around 1%. And it may still be the case soon.
“We could start seeing high-yield savings accounts offering a 1% rate by the end of 2022,” Carlos says.
Here’s what that means for your money. If you open a savings account that pays 1.0% APY and deposit $5,000, you will earn about $50 after one year. With a traditional savings account, you would only earn about $3.
It’s not a life-changing change, but it does make a difference, especially for larger repositories. A high-yield savings account paying an APY of 1.0% with $50,000, for example, will earn about $500 after one year. One with $500,000 will win around $5,025.
These accounts can help you save for short-term goals, like a vacation, or something longer-term, like a down payment on your first home.
How to Open a High Yield Savings Account
There are many different high yield savings accounts, with varying APYs, fees and minimum deposit requirements. (Check out Money’s list of the best high-yield savings accounts to help you decide which one is right for you.)
Ultimately, virtually anyone can open a savings account – and usually for free. Just make sure you have the following items handy:
- A government-issued ID, such as a driver’s license
- Your social security number or tax identification number (TIN)
- Contact details such as your address and telephone number
- Bank account information such as account and routing numbers to make your initial deposit
With a High Yield Savings Account, you can save money while earning it.
For smart and efficient saving, a high-yield savings account is a viable option. Open an account today by clicking below.
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Other places to park your money
A savings account isn’t the only safe place to put your savings. As inflation soars, more and more people turn to Series I Savings Bonds, or “I Bonds,” which track the Consumer Price Index (CPI) and have interest rates that rise with the cost of consumer goods. At the time of this writing, the interest rate on I Bonds is 7.12%.
A certificate of deposit (CD) is another option. Offered by most banks, CDs tend to pay higher interest rates than even the best high-yield savings accounts. But you must lock in your money for a set period of time, usually between six months and five years.
You can also invest in stocks. The S&P 500, a basket of stocks from America’s largest companies, has returned around 27% in 2021. But picking stocks is risky business – if you’re new to investing, a total stock index fund, which tracks from large swathes of market action, is a much safer bet. (Here’s Money’s advice on the best total stock funds for 2022).
If you choose one of these alternative savings vehicles, make sure you have at least three months of saved expenses in an emergency fund that you can access at any time.
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