The problem with a High Yield Savings account
High Yield Savings account is good for one thing – people just starting to save or for short (very short) term investments. This means if you’re working on building up for a vacation and want to try to accumulate interest this could be a good option. Or maybe you’re looking for a property to buy to turn it into a rental property and want to let your money build up a small amount of interest.
Why can’t I use a High Yield Savings account for long term investment?
High Yield Savings account is not good for long term savings because they have such low-interest rates. One of the highest rates that I have seen with no minimum deposit is 1.90%. Which is significantly higher than the national average of 0.05% for traditional savings accounts.
Is 1.90% really that bad?
YES! Let’s do some math to help you visualize how bad 1.90% truly is. Say your initial deposit is $1,500. You contribute $100 a month for 40 years. Your principle on that is $49,000. Your interest on 1.90% compounded yearly is $25,402.46, which is only a total of $74,402.46. That’s at max two years of living expenses with the national average. Most people can not afford to contribute more than $100 a month. Which is partially why this number is so low. 1.90% only can do so much for you in the long run. There are better options out there. In fact, Life Insurance is another option for investing that could yield much higher returns than a small 1.90%. For instance, some REITs are quoting historical returns over 7%.
Can I get a higher percentage with a large deposit?
Not necessarily. Some banks may offer a higher interest rate with a large or larger deposit/balance.
What is a better option?
There are several different options out there for savings and investing in your future. High Yield Savings account is short term – a place for you to put your money for a little bit while you wait for your next big investment. Here are just a few other investing or saving options.
- IRAs (Either Traditional or Roth)
- Real Estate
- Life Insurance
There are a lot of other options out there that are not covered in that list. However the above are some of the most popular options out there for most people.