How a Simple Switch to a High-Yield Savings Account Can Boost Your Earnings

Many traditional savings accounts today offer pitiful interest rates—often less than a quarter of one percent (APY). In fact, some of the biggest name-brand banks are offering as little as 0.01% APY. On a $30,000 balance, that translates to just $3 in interest for the entire year. Not exactly inspiring, right? But what if a small change could make a big difference?

The Power of Online High-Yield Savings Accounts

Online high-yield savings accounts, offered by institutions like Marcus by Goldman Sachs, CIT, MySavingsDirect, Synchrony, Ally Bank, and others, are currently offering rates around 4.5% APY. For the same $30,000 balance, you’d earn approximately $112.50 per month—bringing in $1,347 in interest by the end of the year. That’s a nice chunk of change that could either continue to grow or be used for something more immediate, like paying down a mortgage or student loans.

Using Savings Interest to Pay Down Debt

With mortgage rates hovering around 7% (according to Freddie Mac's Primary Mortgage Market Survey), the spread between what you earn in a high-yield savings account and what you pay on your mortgage is significant. If you have a $30,000 balance in your savings account, it might make sense to use those earnings to pay down debt. Here’s how much difference it could make:

Let’s say you have a new 30-year $450,000 mortgage with a 7% APR. Making an additional $1,378 annual payment (the pre-tax interest earned from a high-yield savings account) could shave off 38 months from your mortgage term and save you $78,465 in interest. While this scenario assumes you’re taking the interest out of your savings, remember that regularly pulling money out of savings could prevent your account from growing at the pace needed to beat inflation.

Accounting for Taxes

It’s important to note that savings account interest is taxable. While your earnings will be subject to tax, in many cases, the taxes on those earnings are already covered by withholding from your paycheck, which simply results in a smaller tax refund. Still, it’s worth considering the after-tax return when evaluating the benefits.

What If You Let the Savings Grow?

Now, let’s imagine you don’t use the interest earnings to pay down debt and let your high-yield savings account continue to grow. While rates fluctuate, let's assume a fixed 4.5% APY. With $30,000 in a low-rate savings account (0.1% APY), your balance grows to $30,150.30 in five years. But with a high-yield account at 4.5% APY, your balance compounds to $37,553.87—a clear advantage.

The Bottom Line

The difference between a traditional savings account and a high-yield savings account is striking, and making the switch typically takes less than 15 minutes. If you're wondering which account to choose, how much you should have, or what to do with your earnings, feel free to reach out! Comment below or fill out the “Let’s Get Acquainted” form for more personalized advice.

It’s time to stop settling for low interest and start making your savings work harder for you.