The Single Best Thing You Can Do with Your Savings Right Now

If you're fortunate enough to have cash sitting in a savings account, we have good news and bad news. First, the bad news: Chances are, the interest rate on your traditional savings account is not enough to keep up with inflation. What that means is that your money is becoming less valuable. It may be safe, but it's losing value with each day it lingers in savings. The good news is that rates on high-yield savings accounts are beating the rate of inflation, giving you somewhere to stash your funds that is safe, secure, and sure to grow.

What is a high-yield savings account?

As the name suggests, a high-yield savings account has features in common with a traditional savings account. The big difference is that a high-yield account offers a higher interest rate. The advantage of a high-yield account is that it allows your money to grow at a faster clip.

The rate at which your money grows is expressed as APY, or annual percentage yield. To put it into perspective, the average savings account offers an APY of less than 0.50%. On the other hand, some of the best high-yield savings accounts offer an APY of 5.00% or more.

Let's say you deposit $2,500 into a savings account with an APY of 0.50%. A year later, your deposit will have earned $12.53 in interest. If you deposit the same $2,500 into a high-yield account with an APY of 5.00% instead, it will earn $127.90 in 12 months. The more you deposit, the more your money will earn.

Role of the Federal Reserve

You've likely heard much about the Federal Reserve, or "Fed," over the last 18 months. That's because the Fed plays a role in what happens to interest rates. The Federal Reserve is the central banking system of the United States. When the Fed is worried that inflation is getting too hot, it cools it down by raising the federal funds rate (the interest rate at which banks loan money to each other). Once the federal funds rate goes up, banks begin charging their customers higher interest rates.

When the Fed feels comfortable that inflation has fallen sufficiently, it lowers the federal funds rate. In turn, banks lower the rates they charge for loans.

In 2022, inflation led the Fed to raise its rates and banks to raise their rates. While taking out a mortgage loan or using a credit card became more expensive, the Fed's move indirectly raised the rates financial institutions paid on deposit accounts, like high-yield savings accounts. The goal is to take advantage of those higher rates while they're available.

But is your money safe?

As long as your bank is a Federal Deposit Insurance Corporation (FDIC) member or your credit union is a member of the National Credit Union Administration (NCUA), your deposits are insured for up to $250,000, per depositor, per ownership category.

That security makes it tough to find a downside to growing your money at a faster pace by moving it from a traditional savings account to a high-yield account.