Why you should open a high-yield savings account immediately

You’re not the only one who saw savings account interest rates drop last year. The US Federal Reserve (a.k.a. the country’s central bank) cut interest rates to near zero early in the COVID-19 outbreak and held them off for most of 2021. This is great news for people applying for (and refinancing) mortgages. , but bad news for those looking to put together their savings.

That could change soon. Most members of the Federal Open Market Committee, which is part of the Federal Reserve Board, expect officials to raise interest rates on three separate occasions in 2022 to fight inflation. If that happens, “we expect high-yield savings account rates to continue,” said Alvin Carlos, his partner managing District Capital Management.

translation? Savers will start seeing returns on their investments again if they know where to invest.

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What is a high yield savings account?

High-yield savings accounts pay a higher rate of return, or annual yield (APY), than traditional savings accounts.

Even in today’s low interest rate environment, banks are still offering APYs of nearly 0.50% for these types of accounts, well above the national average (0.06%) for traditional savings accounts.

Before the pandemic, it was not uncommon to find high-yield savings accounts with yields around 1%. And it may happen again soon.

“By the end of 2022, we may see high-yield savings accounts offering 1% interest,” says Carlos.

Here’s what this means for your money. If you open a savings account that pays 1.0% APY and deposit $5,000, you will earn about $50 after a year. A traditional savings account will only earn you about $3.

This isn’t a life-changing change, but it does make a difference, especially for large deposits. For example, a high-yield savings account that pays $50,000 at 1.0% APY will earn approximately $500 after one year. A person with $500,000 earns about $5,025.

These accounts can help you save for short-term goals like vacations and longer-term goals like a down payment on your first home.

How to Open a High Yield Savings Account

There are many different high yield savings accounts with different APYs, fees and minimum deposit requirements. (Visit Money’s list of the best high-yield savings accounts and choose the one that’s right for you.)

After all, a savings account can basically be opened by anyone and is usually free. Make sure you have the following on hand:

• Government-issued identification, such as a driver’s license
• Social Security Number or Taxpayer Identification Number (TIN)
• Contact information such as address and phone number
• Bank account information such as account number and routing number to make the first deposit

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Other places to park your cash

A savings account isn’t the only safe place to put your savings. As inflation soars, more people are turning to Series I Savings Bonds (“I bonds”), which track the Consumer Price Index (CPI) and increase interest rates according to the price of consumer goods. At the time of this writing, the interest rate on I Bonds is 7.12%.

A Certificate of Deposit (CD) is another option. CDs offered by most banks tend to pay higher interest rates than the best high-yield savings accounts. However, he has to lock the money for a period of time, usually six months to five years.

You can also invest in stocks. The S&P 500, America’s largest basket of stocks, has returned about 27% in 2021. But picking stocks is a risky business. The market is a much safer bet. (This is Money’s advice for the best stock market capital totals for 2022).

If you choose one of these alternative savings options, make sure you have at least three months’ worth of expenses in an emergency fund that you can access at any time.