One thing I’ve been talking about with clients more this year, especially as the year has progressed and interest rates have increased, is high-yield savings accounts. These are savings or money market accounts that are offered by (usually) online banks. However, your Whitaker-Myers Wealth Managers Financial Advisor can help you if you want to consider the Schwab Money Market Fund, which has a current yield of 3.74% as of 11/22/2022.
Online banks have a different business model than your bank that has brick-and-mortar branches where they don’t have physical branches that you can visit. To attract deposits, they offer higher interest rates on their account types (e.g.: checking, savings, CDs, money markets). With rising interest rates this year, the opportunity cost to move a portion of your emergency fund into one of these accounts is greater. If you have $20,000 in high-yield savings and are earning the 10th best rate of 3.50% APY as of 11/18/2022 listed on Investopedia you would earn ~$711 over the course of a year, and even more if you used the Schwab Money Market Fund mentioned above. That comes in handy to have a little extra money for those Christmas gifts.
Features to Consider in a High-Yield Savings
If you’re looking for a high-yield savings account, the things you want to consider are:
- Interest Rate – the bank that is offering the best rate at any one point in time will always change depending on a bank’s desire to attract deposits. There are several that are usually near the top: UFB Direct, Bread Savings, Bask Bank, and Vio Bank to name a few
- FDIC Insured – This ensures that your money is safe if the bank goes out of business, up to the Federal Deposit Insurance Corporation (FDIC) limit of $250,000. Signing up to use an online bank may make you nervous, but it shouldn’t as long as the bank has this insurance. Most if not all of these accounts on financial websites like Investopedia will give you FDIC banks.
- Minimum Account Balance – most banks have some minimum account size. I recommend finding one that has a $0 or $1 limit in case you need to move the funds out of the account for any reason (emergency!)
- Maintenance fees – ensure that the bank you use does not have any maintenance fees
- ATM Access – This can be a less valued feature, especially if you have a checking account with a local bank, but may be helpful to some.
Keep Your Primary Bank Relationship
I recommend keeping your primary checking/banking relationship for many reasons including:
- Convenience of a close physical branch in case you need an ATM that is close to you to use at no charge, a cashier’s check for a large transaction, or a notary for signing a document
- Not having to change all your direct deposit, debits, Roth IRA, or brokerage investment recurring transactions every month
Link your Checking and Automate Your Savings
I also suggest that clients link their high-yield savings to their primary checking so they can move funds from/to their checking when they have a large expense that needs to be paid. You can link from both banks’ websites and apps so regardless of which you’re using you can transfer funds. You may consider keeping a couple of months of expenses in your primary checking and your remaining cash balance in the high-yield savings.
You can even automate your direct deposit to have your sinking funds going into your high-yield account every pay. Say you pay your $5,000 property taxes semi-annually, you spend $3,000 on an annual vacation, and your homeowners and auto insurance of $2,000 is paid quarterly. These costs are $10,000 in total and if you wanted to automate this out of your pay which is bi-weekly, or 26 paychecks a year. You would set up your direct deposit to transfer $384.62 out of every paycheck and then transfer the funds to your checking or pay out of your high-yield account when the expense is due.
Any interest that is paid out is taxable and you will receive a 1099-INT form each year from the bank.
If you have any questions about using a high-yield savings product and how that fits into your financial plan contact one of our Financial Planners.
Author: Andrew Young
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