Is 5% interest good for a high-yield savings account? (2024)

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MoneyWatch: Managing Your Money

Is 5% interest good for a high-yield savings account? (2)

There's no question that it's important to save money. After all, there's no way to predict when the next significant emergency expense might arise. And, when it does pop up, your savings will become your financial safety net.

Moreover, even foreseeable expenses aren't always affordable. For example, you may need to save for years to make a down payment on a home.

But it can be challenging to save money effectively. After all, if your savings aren't earning a return that beats the current inflation rate, you lose buying power over time. A high-yield savings account may be an effective way to solve this problem, but is a 5% interest rate competitive on this type of account?

Compare today's top high-yield savings accounts now.

Is 5% interest good for a high-yield savings account?

According to the FDIC, the national average savings account interest rate is currently 0.47% — but that average is inclusive of traditional savings accounts. So how much of a return can you earn on a high-yield savings account?

Some of the best high-yield savings account interest rates in today's market range from 4.35% to 5.25%. So, if you earn 5% on yours, you're not only beating the national average savings account return by more than 10 times, but you're enjoying one of the most competitive rates on the leading high-yield savings account options.

So, what does 5% interest mean in terms of cash returns? Let's say you put $25,000 into a high-yield savings account. Assuming there are no changes to interest rates, you would earn $1,250 after one year, for a total account balance of $26,250.

After five years, your cash returns would be $6,907.04, for a total balance of $31,907.04. It's important to keep in mind, though, that high-yield savings accounts usually have variable interest rates. So, there's a high likelihood that your return rate will change over time.

Put your money to work with a high-yield savings account today.

What should you use a high-yield savings account for?

"A high-yield savings account provides a place to park funds that will provide a much greater rate of return than a standard" savings account, says Brandon Robinson, president and founder of JBR Associates, a financial service provider in Plano, Texas.

Robinson says the first reason you should have a high-yield savings account "is to have money put aside for an emergency fund that you can quickly access."

"A rule of thumb for this fund is to keep between six and 12 months of living expenses as a balance," Robinson says.

"Another reason to open a high-yield savings account is to build a sinking fund," says Robinson. "A sinking fund is money set aside for a specific purpose (not emergency) like a vacation, wedding, special event, making a large purchase or paying off debt."

So, whether you're saving money for an emergency or a large planned expense, a high-yield savings account is a compelling way to earn a meaningful return on your unused cash.

Why a high-yield savings account is a good place to store idle cash

There are several benefits to saving money with a high-yield savings account. Some of the most important include:

  • High returns: "Because of the higher than normal interest rates currently available with high-yield savings accounts, you have the potential to earn much more in interest than your typical savings account," explains Stacey Black, lead financial educator at BECU.
  • On-demand access: "Unlike CDs, your funds aren't tied up for a set time period when using a high-yield savings account," says Black. That means you'll be able to access your money if you need it for an emergency.
  • Safety: High-yield savings accounts are also relatively safe. They typically come with FDIC or NCUA insurance on balances up to $250,000. Though, if your savings balance is over $250,000, it would likely be wise to spread it over multiple accounts keeping each balance under $250,000. This will ensure that your entire savings balance is insured.

Black went on to explain that "for those living paycheck to paycheck, the amount of APY paid on a savings account may not seem like the highest priority."

However, she says "regardless of what your savings balance is, you could be leaving 'free money' on the table. Just make sure to read the fine print to find out if there are any minimum balance requirements or fees."

Don't leave free money on the table. Open a high-yield savings account now.

The bottom line

A high-yield savings account that pays 5% interest is highly competitive. Not only does it significantly outpace the average savings account interest rate, but it's on the high end of the scale even for high-yield savings products. Compare leading high-yield savings accounts now if you're not earning 5% or more on your unused cash.

Joshua Rodriguez

Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When he's not working, he enjoys time with his wife, two kids and two dogs.

Is 5% interest good for a high-yield savings account? (2024)

FAQs

Is 5% interest good for a high-yield savings account? ›

Some of the best high-yield savings account interest rates in today's market range from 4.35% to 5.25%.

What is a good interest rate for a high-yield savings account? ›

Summary of Best High-Yield Savings Accounts of 2024
AccountForbes Advisor RatingAnnual Percentage Yield
LendingClub High-Yield Savings Account4.65.00% APY
TAB Bank High Yield Savings4.55.27% APY
EverBank Performance℠ Savings4.55.15% APY
Varo Savings Account4.53.00% to 5.00% APY
6 more rows
3 days ago

Is there a downside to a high-yield savings account? ›

Some disadvantages of a high-yield savings account include few withdrawal options, limitations on how many monthly withdrawals you can make, and no access to a branch network if you need it.

Is a 5% yield good? ›

Generally, 5% and above is considered a good rental yield. Anything under this, such as 3%, and you'll struggle to make any real returns on your investment.

Can I trust high-yield savings accounts? ›

Are high-yield savings accounts safe? High-yield savings accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation or the National Credit Union Administration. So your money is as safe as it would be in a traditional savings account.

Can you ever lose your money with high-yield savings account? ›

Losing money in an HYSA is rare, but it can happen.

This type of deposit account is available through many banks and credit unions, particularly online financial institutions. An HYSA works like a traditional savings account, except it offers a much higher annual percentage yield (APY).

What is the catch to a high-yield savings account? ›

Like traditional savings accounts, some financial institutions may limit the number of withdrawals and transfers you can make from a high-yield savings account each month. Exceeding this limit could possibly result in fees or restrictions on your account.

Is 5% a good return on your money? ›

General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.

What does a yield of 5% mean? ›

In finance, yield refers to the income that an investment generates over a period of time. It is expressed as a percentage of the investment's value. For example, if an investment has a yield of 5%, it means that for every $100 invested, the investor will earn $5 in income over the course of a year.

What is the safest investment with the highest return? ›

These seven low-risk but potentially high-return investment options can get the job done:
  • Money market funds.
  • Dividend stocks.
  • Bank certificates of deposit.
  • Annuities.
  • Bond funds.
  • High-yield savings accounts.
  • 60/40 mix of stocks and bonds.
May 13, 2024

Do millionaires use high-yield savings accounts? ›

Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.

What is better, a CD or high-yield savings account? ›

If your goal is to lock in a high rate of interest on funds you don't need to access for a period of time, a CD might be your best option. However, a high-yield savings account may be the better choice if you want to earn solid interest on your savings while still keeping the money relatively accessible.

Should I keep my money in a high-yield savings account? ›

Not the best choice for long-term savings – High-yield savings accounts offer much better interest rates than traditional savings accounts, but often, you won't earn enough over the long-term to account for inflation. Investments may be a better option for a longer-term, greater yield.

How much of your savings should be in a high-yield savings account? ›

For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.

Which bank gives 7% interest on savings accounts? ›

Currently, there are no savings accounts on the market that offer a 7% APY. If you can find a savings account with a 7% interest rate, you'll earn about 15X more than the national savings rate. It's much more common to find a savings rate of 4% to 5% right now.

How much will 50000 make in a high-yield savings account? ›

5% APY: With a 5% CD or high-yield savings account, your $50,000 will accumulate $2,500 in interest in one year. 5.25% APY: A 5.25% CD or high-yield savings account will bring you $2,625 in interest within a year.

What is the average return on a high-yield savings account? ›

Fortunately, you can fix this quickly by opening a high-yield savings account, many of which pay 5% or higher.

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