Only 21% of Adults Have This Type of Bank Account. Are You Missing Out?

What can a high-yield savings account do for you?

If you haven't been living under a rock this year, you know inflation is at record levels. Despite the Federal Reserve's attempts to bring it down by raising the federal funds rate multiple times in 2022, we're still facing an overall inflation rate of 7.7%, according to the latest data from the Consumer Price Index Summary.

This means that on average, costs are up 7.7% between October 2021 and October 2022, and in some categories of purchases, the increases are even bigger. For example, Americans are paying 12.4% more for groceries (or "food at home") this year, and since we've all got to eat, this has left many people digging deeper into their checking accounts to pay those costs.

Speaking of checking accounts, if you've been keeping all your spare cash in one this year, you are missing out. A recent survey by NextAdvisor found that only 21% of American adults are taking advantage of an excellent way to make your money work for you -- a high-yield savings account. What's a high-yield savings account (HYSA), and why do you need one, especially in these inflationary times?

A silver lining of higher interest rates

The Federal Reserve's interest rate hikes this year were intended to influence consumer borrowing rates. The Fed doesn't set these rates, but a higher federal funds rate leads to increases there, and consequently, fewer people should borrow money, thereby cooling off inflation. Ultimately, this means you'll face higher interest rates for credit cards, personal loans, and other means of borrowing money. But we've also been seeing higher APYs on savings accounts.

Savings account interest is a form of compound interest, where your money earns interest, then the interest earns you even more interest. So if you start off with $1,000 in a savings account with an APY (annual percentage yield) of 3%, you'll earn $30 on that $1,000 over the course of a year. If you keep that $1,030 in place and your rate stays the same, the following year, you'll earn $30.90 on it. Compound interest can be dangerous when it comes to carrying a credit card balance, but it's a definite win when it comes to high-yield savings accounts.

Savings accounts are quite user friendly and are often the first bank account kids get when an adult guardian opens one for them. They're a safe (FDIC insured) place to keep your money, and they're best suited to hold money you will need sooner rather than later. This means your emergency fund, or perhaps money you're setting aside for a vacation in a few months. Money you're intending to hang onto for longer should really go into a certificate of deposit (CD), a retirement account, or a brokerage account.

What to look for in a HYSA

Ready to join the just 21% of American adults who have high-yield savings accounts? Your future self will thank you. It's a good idea to do your research and choose an account that offers the following features.

High APY

Not all savings accounts are created equal, and if you look to a big national bank, or one with a lot of brick-and-mortar locations, you will likely find a very low interest rate. Online-only banks are offering the highest rates (along with many other perks), as they don't have to pay to maintain bank buildings.

Easy access

If you're funding a savings account, it stands to reason that you will need ready access to that money. If your car throws a rod and you're facing a big repair bill, you want to be able to pay it out of your emergency fund. So it pays to look for a savings account that comes with an ATM or debit card that allows you to easily withdraw money. Look for a robust network of ATMs in your area as well if you foresee the need to be able to take cash out. You can also consider linking a checking account to your savings account to easily transfer money between the two.

No fees

Paying bank fees just isn't cool anymore, and the good news is that a lot of banks (especially online-only ones) no longer charge you to maintain your account or penalize you for dropping below a certain balance threshold. Ensure the bank you choose to open your HYSA with isn't going to charge you fees.

In many ways, it's a difficult time to be an ordinary American, as the cost of living is up and we face uncertainty in so many ways. Thankfully, high-yield savings accounts offer us the opportunity to earn more interest on our money and build a cushion against the higher costs we're all facing.