You need a high interest savings account. Yes, all of you.
Let us explain why.
Picture yourself taking a walk on a sweltering summer day. The humidity feels like it's at 100% and you immediately regret your decision. The concrete has absorbed sunlight all day and it’s radiating back at you. It feels like you’re walking over hot coals.
At this point, you’re sure it’s hotter than a sauna. Beads of sweat drip down your brow and you are kicking yourself for not wearing a hat or bringing a water bottle with you. You’re so thirsty and devoid of liquids that your throat hurts and you feel weak.
As you pass the local convenience store, the clerk sees you struggling and comes out to offer you a free bottle of ice-cold water. ICE-COLD.
But you ignore the clerk and just keep walking.
You're almost home when you start to feel light-headed and your vision starts to get blurry. You faint from dehydration and wake up to find yourself in the emergency room. If only you had accepted the cold water when it was offered to you. You got lucky this time.
Is that something you would do? Walk away from exactly what you need in a moment of need and put yourself at risk?
If you don’t have a high interest savings account, that’s exactly what you are doing. You're walking away from free money that could help you reach your financial goals and take care of your loved ones.
What Is A High Interest Savings Account, Anyway?
A high interest savings account is a savings account that offers a higher interest rate than a traditional savings account. Yup, it's that simple.
High interest savings accounts are typically offered by online-only banks like CIT. These online-only banks use the money they save from not having to have physical local branches to offer interest rates that may be as high as 200+ times greater than what a typical traditional bank is able to offer.
What Is Considered High Interest?
The mega-banks like Chase, Bank of America, Citi offer savings accounts that start with interest rates ranging from 0.01% APY to 0.04% APY. APY stands for Annual Percentage Yield and is the effective annual rate of return. You can just think about it as your annual interest rate.
These numbers are extremely low.
However, when it comes to earning interest, you want to find an account with the highest number possible.
To put 0.01% interest into context for you, let’s assume for a second that you’ve built an amazing budget and have been saving and investing for retirement like a champ. In fact, you’ve been able to save up $1,000,000.00! You’re a millionaire.
So how much interest would that $1 million earn if you put it into a savings account that only earned 0.01%? $100 per year. A HUNDRED bucks! That’s it. That’s about $8.33 per month in return for letting them hold you million dollars.
You don’t need to be a rocket scientist to know that’s pathetic.
In comparison, the leading high interest savings accounts are earning at least 1%, but the best rates are closer to 1.8% APY.
If you think 1.8% still sounds low, just remember that it’s 180 TIMES larger than 0.01%. In other words, for every $1 you’d earn with a rate of 0.01% APY, you’d earn $180 with a rate of 1.8%!
And this ignores the effect of compounding which means the difference would only grow over time since you’d be earning interest on the money that you made off of previous interest.
How Do You Open A High-Interest Savings Account?
Opening a high-interest savings account is very similar to opening any other kind of savings account, except the process typically has to be completed entirely online.
You’ll want to fund your account by making an online transfer from an existing checking or savings account. Your new bank will walk you through the process and it's super easy.
Some banks will have a required minimum balance, while others won’t. The ones we list below have no minimum balance requirement.
Which Banks Offer High Interest Savings Accounts?
This list includes some of our favorites.
- CIT Bank
- Varo Bank
- Marcus by Goldman Sachs
- Synchrony Bank
- Ally Bank
Are High Interest Savings Accounts More Risky Than Traditional Low Interest Savings Accounts?
No! One beautiful thing about the banks offering high interest savings accounts is that they still play by the rules and regulations of the traditional retail banks.
This means that their accounts are FDIC insured up to $250,000 per depositor. We have both personally had high interest savings accounts for that past decade and the safety or security of our accounts has never been an issue.
Not even at the height of the financial crisis.
When Is The Right Time To Open A High Yield Savings Account?
But seriously, now is the right time. If you are thinking about it and don’t have a high interest savings account then you are leaving money on the table.
Unless you’re the kind of person that enjoys feeling parched on a scorching summer day and would walk away from free ice-cold water.
Some of you might be worried that you don’t have very much money, but the awesome news is that several of the banks that offer the highest interest rates have no minimum balances.
How Much More Interest Could I Get From A High Yield Savings Account Compared To A Normal Savings Account?
Let’s face it, this is the reason that you’re even considering opening a high interest savings account. And when money talks, we listen.
So how much money in interest have you been missing out on if you have a savings account or checking account that earns virtually nothing? Let’s explore an example.
Let’s assume there’s two identical people. Perhaps they are twins…
Ignoring interest, they’ll have $500 saved at the end of month 2, and so on, until they have saved $15,000 by the end of the 5th year. This doesn’t include interest.
The only difference between them is that one of them has a high interest savings account while the other just has a normal low interest savings account.
Assume the high interest savings account earns 2.1% APY compared to 0.01% APY with the traditional low interest savings account.
How much more does the person with the high interest savings account have after 5 years? Let’s see.
As you can see in the example above, the person with the high interest savings account was able to save an extra $811.56.
Not too bad for doing absolutely nothing for it besides switching bank accounts.
What Are The Pros Of High Interest Savings Accounts?
- High interest rates mean you’ll make more money in interest
- Online only banks tend to have fewer fees and lower limit requirements
- Many online banks offer 24/7 customer service via calls or emails
What Are The Cons Of High Interest Savings Accounts?
- No physical branches mean you can’t talk to a specialist in person if you need help
- It may take a few days to transfer the money to a checking account so that you can withdraw it
These High Interest Savings Accounts Sound Amazing, Why Can’t I Just Keep All Of My Money In One?
As attractive as it may seem, there’s a reason why you can’t use high yield savings accounts as your primary bank account. The reason is that there is a federal law that limits the number of monthly withdrawals that you can make to 6.
So if you have 6 bills to pay on a monthly basis, or need to transfer money out more than 6 times a month you could run into issues.
Some banks will penalize you with fees if you exceed the 6 monthly withdrawals and may also convert your account to a checking account. Other banks have their own limits, so you’ll want to check first if you plan to use your account pretty actively.
What Can High Interest Savings Accounts Be Used For?
“So if I am limited in the number of withdrawals that I can make on a monthly basis, how should this account be used?” This is a good question that we get all the time.
The perfect use for a high interest savings account is to save money. Did you read our article about emergency funds? Do you have an emergency fund? These savings accounts can be the perfect place to store money for a rainy day.
If you don’t have an emergency fund, make sure you go learn about that after reading this article. In fact, having money set aside for an emergency is even more important than opening a high interest savings account.
Ideally you’ll want to have at least 3 to 6 months of living expenses saved for emergencies.
As you can see, switching to a high interest savings account is a no-brainer. Not sure if your relationship with money is broken? Not having a high interest savings account may indicate that it is.
Make sure you open your high interest savings account today to have your money start working for you!
No, it won’t solve all of life’s problems. But it’s better than walking right past a free bottle of ice-cold water on a hot summer day.
Looking for other ways to save or make money? Consider refinancing your student loans to lower your monthly payment and interest rate.
Camilo is a personal finance expert who was raised in poverty by a single mother and had to learn everything about personal finance on his own. In addition to running The Finance Twins with his twin brother, he has been featured on Forbes, Business Insider, CNBC, US News, The Simple Dollar and other top publications. Camilo began his career as an investment banking analyst on Wall Street at J.P. Morgan. He has a master of business administration (M.B.A.) degree from Harvard University and a Bachelor of Science in finance from the Wharton School of Business at the University of Pennsylvania. You can contact Camilo here or via Instagram @thefinancetwins.