When you begin your financial journey, there’s no doubt you’ll want to make the most of your income. Can you lose money in a high yield savings account?
Before signing up for a savings account, it’s important to ask this question. High-yield savings accounts could be the answer, but they come with a few disadvantages as well.
What Is the Difference Between a High-Yield Savings Account and a Traditional Savings Account?
Before we get into the details of what high-yield savings accounts include, let’s explore what makes them different. You’ve likely heard of a traditional savings account in the past, where you can safely keep your money. High-yield savings accounts are similar, though there are a couple of notable differences.
By far, the most considerable difference between high-yield and traditional savings accounts is interest. How much interest do you earn on a savings account?
When you have a traditional savings account, your annual percentage yield (APY) could be as low as 0.01%. With high-yield interest accounts, you are more likely to acquire 1% interest or higher, which is significantly above the national average.
As their name suggests, the APY you get per year allows you to gather a higher yield on your total savings over time. This is one of the main reasons why you should consider switching from a regular savings account.
Great for Short-Term Goals
Using a high-yield savings account is slightly different than traditional ones, as it can be better used for short-term goals. For example, if you are purchasing a new vehicle or making a down payment on a home.
With the higher interest payments, you will be able to acquire extra funding to go towards your short-term goals. Where this type of account differs from standard savings accounts relates to inflation.
The APY you receive with high-yield savings accounts can fluctuate throughout the year, as we explain below. In a standard savings account, you will earn less based on your deposited amount, but the interest could stay fixed.
What Is the Downside of a High Yield Savings Account?
The idea of getting more money from your savings account is something that entices even the most affluent spenders. High-yield savings accounts are attractive because their interest payments are often 25% higher than the national average. With that said, there are a few disadvantages to the account that you need to consider.
As mentioned, inflation can significantly affect the amount of extra money you acquire from high-yield accounts. As the interest on your account fluctuates throughout the year, it puts you at risk of falling behind inflation.
For example, let’s say you open a high-yield interest account with 2% APY, and your initial deposit is $10,000. Over the year, you will accrue $200 worth of interest, causing your balance to go up to $10,200.
Now, imagine the inflation rate is 3% for that year. Your account would need to earn $300 to maintain the same buying power you initially had. Unfortunately, your money doesn’t have the same buying power as it once did in this instance.
This example is one of the primary reasons why high-yield savings accounts are best for short-term goals. If you keep your money in your account for six or fewer months, you’ll be less likely to be affected by inflation.
High Initial Deposits
Another considerable disadvantage to these accounts compared to standard savings is their initial deposits. The majority of banks will require you to put a large sum of money into the account for it to be opened.
It is essential to confirm the total amount with your lender, as the values can change from business to business. However, you will likely need at least a few thousand to open your high-yield interest savings account.
On the other hand, you can open a traditional savings account with a minimum deposit of as little as $20. These accounts can be far more affordable for less liquid customers and people looking to start their savings from scratch.
Transaction limits are something that everyone with a bank account encounters at some point. You might have been strapped to making a certain number of withdrawals or transferring specific amounts monthly.
High-yield savings accounts often have restrictions as well, as this can differ depending on the bank. Some account owners are allowed to make six monthly transactions per statement cycle.
There are also plenty of things that count towards the six transactions, making them slightly more challenging to manage. A few examples include:
● Debit card transfers
● Phone transfers
● Point of sale transactions
● Automatic transfers
● Transfers to/from other accounts
● Wire transfer transactions
Do You Pay Taxes on High-Yield Savings Account?
Taxes are another significant thing to consider with this type of savings account, especially if you are earning high interest. This is something to think about when asking how much interest do you earn on a savings account.
Instead of taxing the money that you deposit in your account, you will be responsible for paying taxes on the interest. For example, if you earn $10 interest during your first year of saving, it will count towards your earned income. You will be legally responsible for declaring this amount on your tax return, making it susceptible to income tax.
Taxation is one of the most significant disadvantages of high-yield savings accounts if you regularly earn large amounts of interest.
Can a Savings Account Lose Money?
Are high yield savings accounts safe? If you’re asking this, it’s likely because you’ve heard they can lose money over time. It’s essential to first understand how these accounts work, as they don’t technically lose money but lose spending power instead.
When you deposit your funds into your savings account, the financial institution or the government does not touch them. However, it’s important to remember that the interest rates on your account are variable, as they will change annually.
As earlier discussed, inflation is the primary factor that can affect these accounts with online banks. The longer you keep your money in the account, the more susceptible it is to inflation.
If inflation shoots up higher than your APY, your money will become less valuable. And the less valuable your money is, the fewer things you’ll be able to buy with it. So, depending on how you look at finances, you could say that high-yield savings accounts can lose money over time.
How Much Should I Keep in My High Yield Savings Account?
Is my savings account safe? As discussed, that depends on a lot of factors. If you’re in doubt, it might help to consider how much you’ll want to keep in your accounts. Several factors can influence your deposits, ranging from minimum balance requirements to your income.
Let’s take a look at the recommended deposit accounts for specific situations.
Starting an Emergency Fund
Starting an emergency fund is something that every budget-conscious person should consider doing. This income will become quite handy if you end up losing your job or encounter a severe financial emergency, such as hospital expenses.
When establishing an emergency fund, the total amount you have saved should equate to at least six months’ worth of expenses. You’ll want to make sure all of your necessities will be covered during those six months.
There should be more than enough income for your rent, utilities, prescriptions, and staying on top of debt. Although it can seem intimidating to save this much at first, starting small and working your way up is well worth it.
Are high yield savings accounts safe? They are if you use your high-yield account for short-term purchases. Limiting the amount of time your money is in the account makes it less likely to lose its spending power.
When looking to purchase a new car or putting a down payment on a house, you need to make a budget. First, you’ll want to consider how much the total cost of your expense will be. Next, take your essential monthly expenses into account to see how much money you can part with every month. Once you have these figures in mind, you’ll have a better idea of how much to put away in your high-yield savings account.
For example, if you’re looking to purchase a $400,000 home with a 10% down payment, expect to save $40,000. With this goal in mind, you’ll be able to make regular deposits into your account until you reach your total.
Are High-Yield Savings Accounts FDIC-Insured?
Is my savings account safe? Along with this question, many investors ask whether high-yield savings accounts are FDIC insured. Also, as the majority of these accounts are online, some also wonder whether are online savings accounts safe or not.
With the higher totals you’ll be stowing away, it’s important to ensure you have adequate protection. Like money market accounts in which you get an ATM card for purchases, high-yield accounts are FDIC insured. Those asking are online savings accounts safe must choose a bank that is FDIC-insured.
Otherwise, you won’t be granted the protections you need to guarantee zero risks of capital loss. Even though the amount of interest you earn can decrease, your cash won’t. With reputable lenders, you will have your money insured for up to $250,000.
Can You Lose Money in a High Yield Savings Account?
Can you lose money in a high yield savings account? This is a good question to ask before opening one.
Although your cash doesn’t decrease, the amount of interest you earn can, as the rates are variable. As long as you maintain an adequate balance for a short period of time, these accounts can prove to be incredibly useful.