How high interest rates are making money

How high interest rates are making money

If you're making money without doing anything, it's easy to throw the blinders on. If you're earning a return, is there the best way to do it? I'm earning a return, but is it the best way to do it?

High-yield savings accounts are among the most common examples of this type of account. A renowned online bank, Ally, is offering up to 4.25% interest on savings account deposits. Varo and Bask Bank are offering APYs as high as 5% for their high-yield savings accounts.

If you compare these rates to the current national average - 0.43% - as of this writing, throwing a bunch of cash into a high-yield account may seem like a no-brainer. However, depending on how you spend your money, there may be other ways you can grow your wealth.

With interest rates as high as they are, it's expensive to borrow money - not just for consumers looking to buy a house or open a new line of credit; it's also expensive for banks to borrow from other banks.

By offering savings accounts with higher-than-usual APYs, banks like Ally can lure in a higher number of clients and a larger pool of cash deposits.

In early 2024, many experts expect the Fed to pause and possibly begin lowering interest rates. The banks will adjust their own rates, resulting in the APYs on high-yield savings likely to drop.

The current rates on these accounts are a legitimate way to establish passive income, similar to bonds and money market accounts. But since these APYs aren't locked in - they can change at any time - they're not workable replacements for other growth investments, especially in the long term.

''Tinevitably want to have money there, instead of in equities or other types of investments, if you have a long time horizon,'' said Amy Arnott, an analyst at Morningstar.

Mutual funds, ETFs and stocks are more unstable than savings accounts, but they provide much better long-term returns.

The S&P 500 has had an average annual return of over 12% in the past decade, far better than even the highest high-yield savings APYs in a year full of inordinate savings rates.

Even if you're risk-averse, it's better to look at investments like certificates of deposit or money market funds, which do let you lock in an interest rate, and carry accordingly high or even higher rates than high-yield savings accounts.

How do I use a high-yield savings account?

As an emergency fund for most investors, the best way to leverage a high-yield savings account is to use it as an emergency fund.

Steffen said he was confident he would not be subjected to the pressure of a presidential election.

The real advantage of high-yielding or not savings accounts is that they keep your money accessible.

Adam Stockton, head of Curinos' retail deposits division, sums it up with an anecdote. One weekend, Stockton's water heater sank, causing his basement to be flooded. Between the damages to his home and the off-hours plumber he contacted to handle it, the incident cost him thousands of dollars. His saving grace was a accessible emergency fund.

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The information provided here is accurate as of the published date.