Is 5% interest good for a high-yield savings account?
There's no question that it's important to save money. After all, there's no way to predict when the next significant emergency expense might arise. And, when it does pop up, your savings will become your financial safety net.
Moreover, even foreseeable expenses aren't always affordable. For example, you may need to save for years to make a down payment on a home.
But it can be challenging to save money effectively. After all, if your savings aren't earning a return that beats the current inflation rate, you lose buying power over time. A high-yield savings account may be an effective way to solve this problem, but is a 5% interest rate competitive on this type of account?
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Is 5% interest good for a high-yield savings account?
According to the FDIC, the national average savings account interest rate is currently 0.47% — but that average is inclusive of traditional savings accounts. So how much of a return can you earn on a high-yield savings account?
Some of the best high-yield savings account interest rates in today's market range from 4.35% to 5.25%. So, if you earn 5% on yours, you're not only beating the national average savings account return by more than 10 times, but you're enjoying one of the most competitive rates on the leading high-yield savings account options.
So, what does 5% interest mean in terms of cash returns? Let's say you put $25,000 into a high-yield savings account. Assuming there are no changes to interest rates, you would earn $1,250 after one year, for a total account balance of $26,250.
After five years, your cash returns would be $6,907.04, for a total balance of $31,907.04. It's important to keep in mind, though, that high-yield savings accounts usually have variable interest rates. So, there's a high likelihood that your return rate will change over time.
Put your money to work with a high-yield savings account today.
What should you use a high-yield savings account for?
"A high-yield savings account provides a place to park funds that will provide a much greater rate of return than a standard" savings account, says Brandon Robinson, president and founder of JBR Associates, a financial service provider in Plano, Texas.
Robinson says the first reason you should have a high-yield savings account "is to have money put aside for an emergency fund that you can quickly access."
"A rule of thumb for this fund is to keep between six and 12 months of living expenses as a balance," Robinson says.
"Another reason to open a high-yield savings account is to build a sinking fund," says Robinson. "A sinking fund is money set aside for a specific purpose (not emergency) like a vacation, wedding, special event, making a large purchase or paying off debt."
So, whether you're saving money for an emergency or a large planned expense, a high-yield savings account is a compelling way to earn a meaningful return on your unused cash.
Why a high-yield savings account is a good place to store idle cash
There are several benefits to saving money with a high-yield savings account. Some of the most important include:
- High returns: "Because of the higher than normal interest rates currently available with high-yield savings accounts, you have the potential to earn much more in interest than your typical savings account," explains Stacey Black, lead financial educator at BECU.
- On-demand access: "Unlike CDs, your funds aren't tied up for a set time period when using a high-yield savings account," says Black. That means you'll be able to access your money if you need it for an emergency.
- Safety: High-yield savings accounts are also relatively safe. They typically come with FDIC or NCUA insurance on balances up to $250,000. Though, if your savings balance is over $250,000, it would likely be wise to spread it over multiple accounts keeping each balance under $250,000. This will ensure that your entire savings balance is insured.
Black went on to explain that "for those living paycheck to paycheck, the amount of APY paid on a savings account may not seem like the highest priority."
However, she says "regardless of what your savings balance is, you could be leaving 'free money' on the table. Just make sure to read the fine print to find out if there are any minimum balance requirements or fees."
Don't leave free money on the table. Open a high-yield savings account now.
The bottom line
A high-yield savings account that pays 5% interest is highly competitive. Not only does it significantly outpace the average savings account interest rate, but it's on the high end of the scale even for high-yield savings products. Compare leading high-yield savings accounts now if you're not earning 5% or more on your unused cash.
