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Starting Your Nest Egg with High Yield Savings Accounts

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The first key personal finance goal to strive for is to build savings. Having a stash of cash set aside eliminates the “paycheck to paycheck” mentality and helps ease overall financial stress. In fact, most sources say to build a savings of 3-6 months of expenses as your initial nest egg. You will commonly hear this referred to as a “rainy day fund”, and it is meant to help in situations of losing a job, sickness, unexpected home repairs, and whatever else may come your way.

Where to begin?

Okay, so you want to build your savings. It can be hard to set aside the money when you only have a checking account. After all, spending is easy and admittedly fun, so the goal you set at the beginning of the month often gets compromised. This is where the magic of a savings account comes into the picture, and more importantly, an automatic draft into said savings account. You can open a traditional savings account with virtually any bank and begin depositing immediately.

Any source will tell you, the secret to actually building a savings starts with setting the money aside before you have the chance to spend it. It may seem hard at first, especially if you are scraping the bucket when the next paycheck comes around. However, with a small priority shift and an equally small weekly or bi-weekly automatic draft you’ll be surprised at how fast it can become substantial and even more surprised at how little you notice it’s gone. Now that you’re saving, let’s look at the options for helping that grow.

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High Yield Savings Accounts

Traditional savings accounts have a remarkably low interest rate that you earn on your savings. In fact, the national average as per FDIC in April 2020 is 0.09% APY. Considering an average inflation rate of 2%, this does not take your money very far in the long run. 

Enter High Yield Savings Accounts. 

Over the last 10 years we’ve seen the rise of high yield savings accounts, with APY rates anywhere between 0.8% to 2.0%. This is up to 20x the national average APY. The best part? It is often just as easy as opening a traditional savings account. 

How it works

FDIC insurance is the first thing you want to confirm before opening any checking or savings account. As a reminder, FDIC stands for Federal Deposit Insurance Corporation, and it insures up to $250k of your cash held in a bank in case the bank goes under. This is a given for the well-known institutions, but it’s not a bad idea to make sure for the smaller banks. Make sure you know the difference between FDIC-insured and SIPC-insured.

A common question is whether to be wary of online-only banks. In fact, assuming they are FDIC-insured, online banks are exactly the same as the brick-and-mortar banks and are just as safe. You may even find more efficiencies with an online bank, as many offer convenient mobile banking options and reimbursable ATM-fees. Due to the fact they have less overhead compared to some of the brick and mortar institutions, you will often see higher yields offered from online institutions compared to the average.

What’s the catch?

When you begin the search for a bank to trust with your hard-earned dollars, it is important to read between the lines and assess the fine print. Some banks do have things to look out for, such as minimum balance requirements, maintenance fees, and withdrawal penalties. 

A minimum balance requirement generally would mean that if your balance falls below a certain threshold you incur a penalty. A maintenance fee usually is in the form of a fixed monthly fee, generally $5-$20. For an account with a larger balance this may go unnoticed, but for most it can start to eat away at your savings. Withdrawal and transaction limits are also a consideration. If you envision yourself making numerous withdrawals each month, it may be wise to check for these limits.

Summary

The right High Yield Savings Account can be an essential tool to starting your nest egg and maintaining your rainy day fund. These are straightforward. Research the institution, sniff out any associated fees or restrictions, check the compounding schedule, and you may even find an account with a signup bonus!

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