You work hard for your money. In return, I think it’s only fair that you ask your money to work for you. As you probably already know, if you get your paycheck and just let it sit, the only way you accumulate wealth is by getting another paycheck and letting it sit with the last. Not only does this make it harder to build wealth, but your money will actually be losing value to inflation. As the economy grows, your dollars are worth less and less, which is especially bad during periods with high inflation like we’re in now.
To build wealth, it’s important to understand how you can make your money work in the background, growing even while you sleep. There are several time-tested methods of achieving this, and as a refresher here’s a simple breakdown: money you need this month should be in a checking account, money you need in the next 12 months in a savings account, and money beyond the next 12 months in either stocks, bonds, or CDs. Where does a high-yield savings account fit in this picture? It’s an alternative to a savings account that offers a higher yield, meaning it will help your money work harder than the typical savings account.
Even though it’s got a fancy name, a high-yield savings account isn’t something you should be scared of, and there’s a good reason behind why you get a better return than a traditional savings account. High-yield savings accounts are most commonly offered by online banks, banks that don’t have any physical locations you can go into. They offer you a higher rate of return because they don’t have nearly as many expenses as other banks do. Your local bank location needs to pay for the costs of having a physical building like keeping the lights on, as well as pay the tellers working behind the counter. An online bank doesn’t have any of those expenses, so they can pass the savings on to you in the form of a higher interest rate! So while your physical bank offers only a fraction of a percent interest on savings accounts, many online banks are currently offering over 4%. It’s important to note that an online bank does not offer all the same features as a physical bank, and it’s wise to keep some money in your current bank account to access those features. An online bank cannot take physical cash or check deposits, and you often can’t write checks from an online bank. That’s why I recommend having both a traditional bank account as well as an online bank account for the best of both worlds.
There are many investment options that will give you higher than a 4% return, and you obviously want your money working as hard as possible. However, for savings like an emergency fund or new car, you want that money to be secure without the risk of it going down. Other investments may give a higher return, but this is because they also carry the risk of potentially declining over time. For any kind of savings goal within the next 12 months, a high-yield account is going to be your best bet for guaranteed steady growth.
I strongly recommend you do your own research to decide which online bank and high-yield savings account is right for you. NerdWallet is one place to go to find a great breakdown of pros and cons of each account, often updated monthly. Regardless of which option you choose the most important thing to check is if the account has FDIC insurance. FDIC insurance is an agreement between the bank and the government where the government has promised to refund you up to $250,000 if anything were to happen to the bank, no questions asked. Although the hope is that you never need this insurance, it is the best test to make sure what you’re looking at is legit.
I personally use Marcus by Goldman Sachs and am very happy with it. Although the return on this account isn’t as high as you will find at other banks (4.4% in October 2023), it had several features making it personally attractive to me. Most importantly, Marcus offers live US-based customer service. This is something I look for with any account I open, as I always want to be able to clearly communicate with another native English speaker should something go wrong. Marcus also has no transaction fees and no minimum account balance, making it easier to move money in and out with peace of mind. If Marcus seems like a good fit for you, use my link below for an extra 1% interest for 3 months on your account. To be completely transparent – this also boosts me 1% for 3 months as well. Referral deals like this allow me to continue to produce high-quality, free content. But again, I encourage you to do your own research and take the time to fully understand the rules of the game.