Should you use a High Yield Saving Account?Dec 17, 2023
Hello Stoic Investors,
Today we are going to answer this question: Should you get a High-Yield Saving Account?
If you're thinking 'yes', then this news letter is a must-read. High-yield savings accounts have their
advantages, but they're not without risks.
Today, we're going to break down when it's a good idea to use these accounts and what you really need to
know about them.
What are High Yield Savings Accounts?
High-yield savings accounts look like a great place to keep your money, especially if you're just looking to
save rather than invest. Regular savings accounts offer about 0.33% interest, but high-yield ones are
offering around 4.88% this December.
However, how long will this last? Many online sources say you should go for these accounts because
they're offered by online banks with great deals. But that's not the whole story. The truth is, high-yield
savings accounts often offer these attractive interest rates only for a short time.
Regarding their safety, they are absolutely secure. As a matter of fact, when you deposit your money in a
high savings account, you're entrusting it to a bank. And even if that bank fails, the government has got your
back, protecting your money up to $250,000.
How Can They Guarantee This Return?
The return of these accounts is measured as annual percentage yield or APY. However, a consideration to
make is whether the APY remains constant, which is often not assured. Banks have the ability to alter the
APY, and they frequently fail to clearly communicate that these rates are subject to change.
Different banks provide various potential APYs, each with specific conditions. These options are reliable, but
how are these returns possible?
The key lies in interest rates.
Interest rates have a significant impact on numerous aspects of your life, including stock market returns,
your mortgage payments, and the earnings from high-yield savings accounts.
In 2020, interest rates were around 0%, which means that high yield savings accounts would give you 0%.
This is why no one was using them or talking about them.
The reality is that these high yields are offering 5% now because that's what the central bank is offering.
Here's how it works:
The central bank promises to give regional banks a 5.5% return. Then, these regional banks offer us regular
folks savings accounts with a 5% return. They earn a risk-free 0.5% profit from this difference. Plus, you can
buy a bond straight from the central bank and earn a bit more.
Good Returns Won't Last: What Should You Do?
High yields are based on the interest rates we have right now, so if interest rates go down, the return of a
high yield savings account will be less.
This means that sadly good returns won't last.
For example, the Fed shows that the central bank will cut interest rate by 0.75% in 2024, which means that
the APY advertised as 5% will be less in the future.
However, I'm not saying you should skip high-yield accounts. They're a good deal right now, but remember,
this won't last forever. It's not a magic solution. Think of it like a one-year thing, and then things might go
back to how they were before.
Here's what I suggest to you:
For the money in the short term that you want very liquid, just keep it in the high savings account.
But if you are saving money for something that will take more than 6-12 months, like a wedding, a down
payment on a house, or your emergency fund, buy a bond that gives you the current interest rate.
For example, a 5-year bond at 5% will guarantee that return for the next 5 years, even if interest rates drop
Always take a moment to think about the reasons behind what you're doing.
Don't make decisions based solely on what an online influencer suggests.
It's important to understand the 'why' behind your choices, ensuring they align with your own needs and
values, rather than just going along with someone else's advice.
So, note down these points and start investing today:
1. High yield savings accounts are generally safe, and in the event of a bank failure, the government
protects your assets up to $250,000.
2. Their returns are closely tied to central bank interest rates. When these rates drop, so do the
returns on your savings.
3. For savings goals beyond 6-12 months, consider purchasing bonds that lock in current interest
rates, independent of future interest rate fluctuations.