Why everyone should have a high-yield savings account

Money doesn’t grow on trees. And it also doesn’t grow in savings accounts at brick-and-mortar banks like Chase, Wells Fargo, and Bank of America. In fact (as of this writing) the average interest rate across all US based savings accounts is a paltry 0.09%. Yet, a few clicks away you can find rates that are 20x higher and requiring no additional risk. What gives?

Meet the High-Yield Savings Account

If a bank has tellers and physical locations, it’s got a ton of overhead operating costs. (And if it’s JP Morgan Chase, it also has 250,000 employees.) These bloated cost infrastructures then get passed along to you, the consumer (i.e. saver) in the form of lower rates.

Enter a new crop of bank accounts that are “online only” including offerings from Marcus, Ally Bank, American Express Bank. With limited overhead, they are able to pass along the cost savings to the saver, in many instances offering rates in excess of 2% (as of this writing).

So what’s the catch?

Unless you enjoy the experience of interacting with bank tellers, there is none. In a world of digital transactions, the friction of setting up new digital accounts is de minimis (just make sure that your digital security is bulletproof). Most of these accounts don’t have minimums and many offer rebates on ATM withdrawals.

Isn’t a no-name bank more risky?

Nope. Meet your friend, the Federal Deposit Insurance Corp (aka FDIC). Without getting into the technicalities, what you need to know is that the US government insures all bank deposits up to $250,000. And if you’ve got more than that, you can spread it across different banks and keep that protection. This means that even if your bank goes under, the US government would protect your deposit (as long as it was also solvent). So whether you pick Citibank, Symphony, or Citizens it’s all the same amount of risk.

Should I just dump all my money in these?

Not so fast. While they are wonderful savings vehicles, it’s important to remember that these are daily rates and they can fluctuate. While they tend to move alongside the yield curve, often times online banks will bump up rates to acquire new customers, only to then have them retreat lower.

Some of the “incumbents” (Ally, Amex, Barclays, and Capital One) tend to always be near the top, but if you want to truly optimize, you’ll have to be vigilant and monitor the rates using a comparison tool like bankrate.com.

Then don’t forget taxes. Interest income is taxed as ordinary income (i.e. the same rate as your salary) which pits it unfavorably against capital gains or dividend taxes. These tax differentials compound meaningfully over the long term.

And finally, there’s inflation. Evaluating a savings rate in isolation overlooks the fact that these rates are part of an interconnected system of inflation, the health of the economy, Fed policy (and a bajillion other variables). If the rate of inflation exceeds your interest rate (which is typically the case for savings accounts) you’ve actually lost purchasing power. A diversified portfolio should have assets that can outpace the rate of inflation, such as (but not limited to) stocks, real estate and commodities.

It’s one tool in the toolkit

There’s no excuse to not have a high-yield savings account, in fact, at the minimum it should be where you park your emergency fund. Stop leaving money on the table and set one up today!

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