By Spencer Tierney
Last year’s savings rates of 2% and higher have come and gone, but that doesn’t mean high-yield savings accounts disappeared.
“There are high-yield savings accounts out there, but it’s all relative,” says Mike Schenk, chief economist for the Credit Union National Association.
When the Federal Reserve cut its benchmark rate to nearly zero in March, many banks and credit unions took their cue to lower rates on savings accounts. This affected online high-yield accounts more drastically than others. And it’s unclear when to expect rates to rise as the pandemic and related economic uncertainty continue.
If you’re thinking about getting a high-yield savings account or ditching the one you have, don’t fall for these misconceptions.
Myth 1: A High-Yield Savings Account has the Same Rate Over Time
Not true, which can be good and bad. Savings accounts have variable rates that are subject to change, so an account you opened last week might not have the same rate this week. This means rising rates can benefit you without you doing anything. But on the flip side, rate drops can occur and, as in recent months, even become common.
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From March to September 2020, the average rate across 15 online banks’ high-yield savings accounts dropped from 1.70% to 0.90% annual percentage yield, based on a NerdWallet analysis.
Despite this, having a high-yield and typically online-based savings account still blows traditional options out of the water. Their rates remain far above the national average of 0.05% for savings accounts. And if you already have a high-yield account and you’re itching to switch for a higher rate, maybe reconsider. Rates may keep dropping.
Myth 2: The Most Important Aspect of a High-Yield Savings Account Is the Rate
Not exactly. The rate has big appeal, but a high-yield account’s safety, lack of fees and easy access to funds shouldn’t be overlooked.
Like other savings options, high-yield accounts are federally insured up to the standard limit of $250,000. This ensures that a bank failure won’t rob you of your money. You can double-check that an account is insured by finding the bank on the Federal Deposit Insurance Corp.’s BankFind tool. Some online banking firms like Chime and Simple have a partner bank to provide their FDIC insurance;
check the fine print at the bottom of the website’s pages for details. Credit unions receive equivalent insurance through the National Credit Union Administration, which you can look up on NCUA’s Research a Credit Union tool.
Most high-yield savings accounts don’t have monthly fees, which can save you money. Quick access to funds is also crucial, especially if you need cash on short notice during a crisis like the current pandemic.
Myth 3: Your Money Is Harder to Access in an Online Savings Account
That’s not true in most cases. Like traditional savings accounts, high-yield options provide ways to transfer money online to and from accounts you own at other banks. Generally, it takes a few weekdays for banks to process transfers, but some online banks also offer faster ways to access funds, such as ATM withdrawals and wire transfers.
Since online banks tend to be where the high-yield savings accounts are, chances are you’ll lose branch access in order to gain a top rate. But how often do you visit a branch, especially this year?
Myth 4: All Savings Accounts Make Your Money Accessible at the Same Speed
Nope, and this may matter. How long a bank takes to process transactions can be the reason you’re waiting for money longer than expected. Every bank has a funds availability policy that states how long it takes to settle transactions: for example, processing cash and government checks the day after a bank receives them.
But banks can make exceptions. Funds can take longer to become available, such as seven days, especially for accounts opened within the previous 30 days and for check deposits over $5,000. Switching banks may also carry an adjustment period with some processing delays. But if your bank processes transactions more slowly than others, it can be a real problem if you expect to need your money soon after depositing it.
“Ask your regular bank how long they hold funds,” says Dana Twight, certified financial planner and owner of the Seattle area-based firm Twight Financial. “I just had a call with my credit union where they were withholding an ATM deposit for three days because it came from another credit union.”
Myth 5: The Main Purpose of a High-Yield Savings Account Is to Earn Interest
It’s tempting to think so, but no. Contributing money to a savings account consistently and over time will likely raise your balance a lot more than interest payments will. And a savings account is the ideal place to grow your money with an eye toward goals, such as saving for a down payment on a house or building an emergency fund of three to six months of living expenses.
“No dollar amount is too small” to save, Twight says. Once “you have an emergency fund, you have increased your ability to make choices when hard times come.”
Your account rate may waver, but your approach toward saving matters more.
John Thompson, chief program officer at the national nonprofit Financial Health Network, says, “To save with a plan … is one of the most critical behaviors for improving and sustaining financial health.”
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Spencer Tierney is a writer at NerdWallet. Email: [email protected] Twitter: @SpencerNerd.