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July 28th, 2022

High Yield Savings Accounts—Too Good to be True?

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Anthony S. from Bethlehem, PA asks: Hello Mitch, I have seen several online ads and received a few mailers about high-yield savings accounts. My bank currently pays 0.2% on savings accounts, so the ability to earn a 4% yield has high appeal to me. It feels like a catch here but I’d be curious to hear your thoughts.

Mitch’s Response:

Thank you for your email. I appreciate that you are interested in earning a higher yield on your savings – it has been a long stretch of ultralow interest rates, which hurts savers trying to earn risk-free return on cash. Interest rates are moving higher, but the latest reading I’ve seen is that the average yield on bank savings accounts rose by 0.06% to a yield of 0.1% – not exactly an inspiring return. Over the same period, inflation ran at 9.1%, which makes cash that much less valuable.1

The high yield savings accounts you’re referring to in your question largely come from start-up financial technology companies, often referred to as “fintech” companies. I too have seen advertisements for 5+% annual yields on savings accounts, which sounds very appealing especially in a low rate, high inflation environment.

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But there are of course a few catches.

The first and most important caveat is that these offerings are not conventional savings accounts, meaning that nearly all of them are not insured by the Federal Deposit Insurance Corp, or FDIC. You have probably seen “FDIC-insured” printed on your traditional bank materials, which signifies that your deposits are insured up to $250,000 per account. If your bank goes under, the government will guarantee you don’t lose that money.

Fintech companies are generally not treated as banks, and therefore do not follow the same rules that banks do. On one level, many of the bank deposits are not insured by the FDIC, which already inserts a layer of risk. But the bigger, perhaps more meaningful catch is that the advertised yield is not guaranteed – generally speaking, the fintech company takes your savings deposit and invests it in securities and other assets designed to generate yield, which they then pass on to customers in the form of the advertised rate. But those returns are not guaranteed and could fluctuate over time.

Another potential catch for earning the advertised yield is that you must sometimes do business with affiliated businesses of the fintech startups, which may or may not be a desirable outcome. In other cases, spending targets are needed to earn the yield, which may have you spending money you would not have otherwise spent.

The bottom line, in my view, is that marketing messages for high-yield accounts often seem like they are a sure thing, but there are is almost always fine print and risk – two things you usually do not want to associate with savings accounts.

Not reading such fine print is a common mistake investors make. There are some other common mistakes that we have seen investors make with their portfolios that can be avoided. To give you more insight into how to avoid these mistakes, we recommend reading our guide, “8 Retirement Mistakes to Avoid.” This guide dives deeper into the following mistakes:

If you have $500,000 or more to invest, claim your copy of our guide, 8 Retirement Mistakes You Need to Avoid,3 by clicking on the link below.

Disclosure

1 The Wall Street Journal, July 15, 2022. https://www.wsj.com/articles/hoarding-cash-high-yield-savings-fintech-apps-11657897636?mod=markets_lead_pos5

2 ZIM may amend or rescind the free guide “8 of the biggest retirement mistakes investors should avoid” for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the free guide “8 of the biggest retirement mistakes investors should avoid” for any reason and at ZIM’s discretion.


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