Instead of opening a traditional savings account, people can choose among banks that offer high-yield savings accounts. Interest earned on deposits can be significantly greater than the percentage yield on a typical savings account, said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.
"That means your money will be working harder and can get you to your savings goals faster," he said.
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5 savings account terms to know
Here are the five key terms to know about high-yield savings accounts and why they are important.
- Annual Percentage Yield (APY)
- ACH transfer
- Certificate of Deposit (CD)
- Grace period
- Maturity date
1. Annual Percentage Yield
The annual percentage yield is the total amount of interest earned over the course of 12 months in a savings account. This rate includes the impact of compounding interest from month to month.
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2. ACH transfer
An automated clearing house (ACH) is the electronic method system that companies, government agencies and institutions use to make direct deposits into a bank account. Many employers use an ACH transfer to make payroll deposits and other institutions use them to direct deposit tax refunds or unemployment funds.
3. Certificate of deposit
A certificate of deposit encourages consumers to save for a longer period by offering higher interest rates than a savings account. The interest rate is locked in and can't be lowered during that period.
"Owning a CD allows an investor to get a potentially higher return on cash assets they are looking to protect versus leaving cash assets in a low yielding bank account," said Daren Blonski, managing principal of Sonoma Wealth Management in California.
A CD term length is the amount of time that money needs to be kept in a CD for individuals to receive the entire amount of interest being offered by a bank or credit union. An early withdrawal penalty is the money deducted when a consumer withdraws from the CD before the maturity date. If a consumer opens a one-year CD, the money needs to remain in the CD for 12 months or a certain amount of interest will not be paid to that account.
"A CD will charge a penalty of a set number of months in interest as a portion of the full term if you withdraw funds before the term expires," Bruce McClary said. "The longest-term CDs have higher penalty fees than short term accounts."
A CD ladder is used by people to save money over different lengths of time for different purposes. A consumer could have a six-month, one-year and 18-month CD to receive the maximum amount of interest.
"CD ladders allow you to diversify maturities and rates of returns while maintaining a semi-constant cash position," Blonski said.
Laddering CDs helps people receive higher returns over a period of several years.
"A CD ladder is a strategy where you take an amount you want to save and split the investment up across several different certificates of deposit with different terms," McClary said. "The intent is to get a range of higher returns across many accounts instead of using a single CD for the entire amount."
Unlike a high-yield savings account, CDs are intended for longer term savings such as a down payment or vacation. The money in a CD is not intended for expenditures such as paying bills or an emergency such as a car repair or unexpected medical expense.
Money for an emergency should be allocated in a high-yield savings account since money can be withdrawn at any time without penalty.
"These accounts give savers a boost when it comes to earned interest and reaching savings goals faster," McClary said. "Diversifying savings between CDs and high-yield accounts can provide a varying level of access and earning power to serve both long and short-term goals."
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4. Grace period
A grace period is tje window of time where an individual can withdraw funds at the time the CD account matures and before it automatically renews, McClary said.
5. Maturity date
A maturity date for a CD is when an individual can withdraw the amount of money in the account, plus the interest that has been accrued. If a consumer opens an 18-month CD, the maturity date is 18 months from the day that the CD is funded.
Consumers should shop around and compare the requirements being offered by a bank for a high-yield savings account to see which one fits their needs the best. Many banks no longer require minimum balance requirements or charge monthly fees.
It can be simple to determine quick and easy ways to save money by visiting Credible to find a high-yield savings option that best fits your goals.