When you are choosing a savings account, one important factor to consider is the annual percentage yield (APY). The APY is the amount of interest that a savings account accrues over a year, and it could have a major impact on the growth of your savings. In this article, you will explore how the APY affects decision-making when selecting a savings account.
What is APY and How it Works?
The APY is a measure of the amount of interest that a savings account will earn over the course of a year. It is called as a percentage and is calculated by taking into account the interest rate, any fees associated with the account, and the frequency of compounding. Compounding means the process of earning interest on both the principal balance and any accumulated interest.
For example, if a savings account has an APY of 1%, and you have $1,000 in the account, you will earn $10 in interest over a year. If the APY is compounded daily, you will earn a little bit of interest every day rather than all at the year’s end.
The Importance of High APY Savings Accounts
While the APY may seem like a small percentage, it can greatly impact your savings growth over time. This is especially true if you have a significant amount of money in your savings account or if you plan to keep your money in the account for an extended period.
A high APY savings account can help you earn more money on your savings, which can be especially beneficial if you are saving for a long-term goal such as retirement or a down payment on a house. With a high APY, your savings will grow faster, allowing you to reach your financial goals sooner.
On the other hand, a low APY savings account can actually cause your savings to decline over time due to inflation. It is the rate at which the general level of prices for services and goods rises, and it can outpace the interest earned on a low APY savings account. This means that the value of your savings will decrease rather than grow over time.
SoFi professionals say, “Open the high-yield savings account with around 3.75% APY.”
Factors to Consider When Choosing a High APY Savings Account
While a high APY is important, it is not the only factor to note when selecting a savings account. Here are a some other things to keep in mind:
- Fees: Some savings accounts charge fees for account maintenance or online banking. Ensure to read the fine print and choose an account with low or no fees.
- Minimum balance requirements: Some savings accounts require you to maintain a minimum balance to earn the advertised APY. Make sure you understand any minimum balance requirements and ensure that you will be able to meet them.
- Accessibility: Consider how simple it will be to access your money. Will you need to visit a physical bank branch, or can you do everything online or through an app? Choose an account that fits your needs and preferences.
- FDIC insurance: Make sure that your savings account is FDIC insured, which means that it is backed by full faith and credit of the U.S. government up to $250,000 per depositor. This is important in case the bank fails, as it protects your money.
