How to use high-yield savings accounts to build passive income

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How to use high-yield savings accounts to build passive income

If you're making a lot of money, is it easy to throw the blinders on instead of stepping back and scrutinizing?

High-yield savings accounts are a prime example of investing in high-yield savings accounts. Ally, one of the world's most renowned online banks, 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. But depending on your financial circumstances, there may be more powerful ways to grow your wealth.

With interest rates as high as they are, it's expensive to borrow money - and not only 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 can lure in more clients and a larger pool of cash deposits.

Many experts expect the Fed to pause and maybe even begin lowering interest rates in early 2024. As this happens, banks will adjust their own rates, meaning that APYs are likely to drop on high-yield savings.

The current interest rates on these accounts provide a genuine way to build passive income, similar to bonds and money market accounts. But since those APYs aren't locked in - they can change at any time - they're not workable replacements for other growth investment, 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,'' says Amy Arnott, an analyst at Morningstar.

While mutual funds, ETFs and stocks are more unstable than savings accounts, they yield far better long-term returns.

As of late, the S&P 500 has experienced 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 more risk-averse, it's often a better idea to look into investments like certificates of deposit or money market funds, which DO let you lock in an interest rate and carry similar or even higher rates than high-yield savings accounts.

How do you use a high-yield savings account?

With a high-yield savings account, most investors prefer to use it as an emergency fund.

Steffen, who is chairman of the board of directors, says: 'It's a good thing that we can't do what we're going to do,' he said.

The real benefit of saving accounts, whether it's high-yielding or not, is that they keep your money accessible.

Curinos' head of retail deposits, Adam Stockton, sums it up with an anecdote. One weekend, Stockton's water heater triggered a leak that flooded his basement. The incident cost him thousands of dollars, as well as the damage to his home and the off-hours plumber he called to handle it. His saving grace was an accessible emergency fund.

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