If you want to grow your money without taking too much risk, you might want to consider opening a savings account with a higher APY. APY stands for annual percentage yield and measures how much interest you can earn from your savings account in a year. The higher the APY, the more money you can make from your deposits.
But how do you find the best savings account with higher APY? There are many factors to consider, such as the minimum balance requirement, the fees, the accessibility, and the security of your funds. Here are some tips on comparing different savings accounts and choosing the one that suits your needs and goals.
What is APY and Why Does It Matter?
APY is the interest you earn on your money in a year, considering the effect of compounding. Compounding is when the interest you earn is added to your principal balance, and then you earn interest on that new amount. The more frequently your interest compounds, the faster your money grows.
APY matters because it shows how much your money can grow in a savings account over time. The higher the APY, the more interest you earn, and your money grows. For example, if you deposit $10,000 in a savings account with a 1% APY that compounds monthly, you will have $10,104.71 after one year. But if you deposit the same amount in a savings account with a 2% APY that compounds monthly, you will have $10,518.42 after one year. That’s an extra $413.71 just by choosing a higher APY.
What is a Savings Account with Higher APY?
A savings account with a higher APY is a bank account that pays you interest on your money. Unlike a regular savings account, which usually offers a low-interest rate of around 0.06%, a savings account with higher APY can offer rates as high as 5% or more.
Online banks and financial institutions typically offer these accounts, which have lower overhead costs than traditional brick-and-mortar banks. Online banks can pass those savings to their customers through higher interest rates.
However, not all savings accounts with higher APY are created equal. Some may have stricter requirements or limitations than others. For example, some may require you to maintain a certain balance in your account or limit your monthly withdrawals. Others may charge fees for certain transactions or services, such as ATM withdrawals, wire transfers, or overdrafts.
Therefore, reading the fine print and comparing different options is important before opening a savings account with a higher APY.
How to Compare Savings Accounts with Higher APY
When comparing savings accounts with higher APY, there are several factors to consider:
The interest rate determines how much interest you can earn from your money in a year. However, keep in mind that some interest rates may vary depending on the market conditions or the balance in your account. Also, some interest rates may be promotional and only last for a limited time.
Compounding frequency refers to how often the interest is added to your principal balance. The more frequently the interest is compounded, the faster your money grows. For example, if your interest is compounded daily, you will earn more interest than if it is compounded monthly or annually.
Minimum balance requirement
This is the minimum amount of money you need to keep in your savings account to earn interest or avoid fees. Some savings accounts with higher APY may have no minimum balance requirement. In contrast, others may require you to maintain a certain balance to qualify for the higher interest rate or avoid monthly maintenance fees.
Fees and charges
Some common fees and charges include account closure fees, falling below minimum balance fees, account dormancy fees, withholding tax for interest earned, excess withdrawal fees, ATM fees, wire transfer fees, overdraft fees, etc. These fees can eat into your earnings and reduce your effective APY.
Some savings accounts with higher APY may offer more features and convenience than others, such as online banking, mobile banking, check-writing abilities, debit cards, ATM access, etc. However, some savings accounts may also limit the monthly withdrawals or transfers you can make without penalty.
You want to ensure that your savings account is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), which protects your deposits up to $250,000 per depositor per institution in case of bank failure. You also want to check the reputation and ratings of the bank or financial institution that offers the savings account.
By comparing these factors among different savings accounts with higher APY, you can find the best one that meets your needs and goals.
How to Maximize Your Savings Account with Higher APY
Once you have found the best savings account with a higher APY for your needs, you can maximize your savings by following these tips:
Deposit as much as you can
The more money you deposit in your savings account, the more interest you earn and the faster your money grows. Save 10% to 20% of your monthly income and deposit it in your savings account.
Avoid withdrawing too often
Withdrawing more money from your savings account will lessen the interest you earn and the slower it grows. Avoid using your savings account as a checking account, and limit your withdrawals when needed.
Automate your savings
The easiest way to save money is to automate it. You can set up a recurring transfer from your checking account to your savings account every month or every paycheck. This way, you don’t have to remember to save and can avoid spending money you could have saved.
Review your savings goals
Maintain your motivation to save by having a clear and specific goal in mind. Whether you’re saving for an emergency fund, a vacation, a down payment, or retirement, having a goal can help you track your progress and celebrate your accomplishments.
A savings account with a higher APY is a great way to grow your money without taking too much risk. However, not all savings accounts with higher APY are the same. You should compare various factors, including interest rate, minimum balance requirement, fees, accessibility, and fund security. Doing so lets you find the best savings account with a higher APY that suits your needs and goals.