If anyone has ever told you that you should be looking for a “high-yield” banking account and you’ve drawn a blank…this is for you.
What’s an interest-bearing account? At its most basic, an interest-bearing account is just an account at a bank or credit union that accrues interest (read: money!) over a set period of time. If you’re down to get serious about saving, here’s what you need to know.
“One of the ways banks make money is by taking the cash you leave in your savings account and loaning it to other customers via mortgages, car loans, etc.” says Pamela Capalad, a financial planner and founder of Brunch & Budget.
“To incentivize you to keep your money in a savings account, they essentially pay you a certain percentage of interest for every dollar you keep in that account, so the longer you keep it in there, the more interest they pay you.”
While most people associate interest-bearing accounts with savings accounts (however miniscule the interest rate may be), there are other options available to consumers that are also insured by the Federal Deposit Insurance Corporation, usually up to $250,000.
Aside from savings accounts, however, consumers also have the option of opening a few other account types:
- Interest-bearing checking accounts (sometimes called NOWs, for “negotiable order of withdrawal”)
- Money market accounts (typically called MMDAs)
- Certificate of deposits (CDs for short)
What are the benefits and drawbacks?
It depends on the account you have, but namely: You’re earning money by keeping your funds within a bank. So, consider any interest accrued to be the bank’s ‘thank you’ for allowing them to use your hard-earned money. Or, you could rationalize it like Capalad, who says, “If you’re going to leave your money in the bank, you may as well get paid for it right?”
What differentiates each type of interest-bearing account is a number of different restrictions and requirements, like how much you earn back or when and how often you can tap into the funds.
That’s why it’s a good idea to study up on the various types of banking accounts available to determine which one you think is best suited for you. Again, in general terms, you can think of it in the following way: Savings accounts might have a low interest rate, but if left for a prolonged period of time, there’s still the chance for a consumer to make a not-too-bad profit years down the line.
In this way, interest-bearing savings accounts are closer to a type of long-term investment, according to Bankrate.com, since you can’t access the funds via a debit card or by writing a check. Which is annoying if you want to make impulse purchases with your savings, and helpful if you’re dedicated to keep your extra cash out of sight, out of mind.
The good thing is, however, that there are few fees associated with typical savings accounts, since the banks don’t rely on them to make their profit. Capalad says she usually suggests her clients maintain their primary savings account at a bank different from where they have their checking account.
Doing so, she says, creates an “extra layer” between consumers and their savings that often makes them them hit pause before pulling from their savings.
OK, I’m sold. What’s the best way to shop for a high-yield savings account?
Look for one with no minimum balances, no monthly maintenance fees, and also the ability to open as many accounts as you want easily, Capalad says. Many of the higher interest accounts are also found online, so look for cues that your funds will be in reliable hands.
A good website that lets you easily connect to your primary checking account is a good sign, Capalad says, as well as helpful customer service.
While some high-yield interest savings accounts can require extra of applicants, like a large minimum deposit/balance or a certain number of required, monthly transactions, there are other, less cumbersome options.
Banks like Ally Bank, Amex Savings, and Marcus pay between 1.45 to 1.5 percent and are free to keep open regardless of the amount you have deposited, Capaland says. Now, all’s that left if for you to start saving!