High-yield savings accounts can help your money grow faster than traditional savings accounts, but many people mistakenly think that the returns these types of accounts can deliver are too good to be true.
"They have a misconception that it's not legit," Colby Dickson, a wealth management advisor at Northwestern Mutual, tells CNBC Make It.
Never fear, they are. Like traditional savings accounts, high-yield savings accounts are backed by the Federal Deposit Insurance Corporation, which is an independent U.S. government agency. With FDIC-insured banks, up to $250,000 of your deposits are covered in the event that the bank fails.
And there's a straightforward reason these accounts are able to offer higher rates. Online banks that offer high-yield savings accounts tend to have lower overhead costs than traditional banks, since they aren't paying for physical locations and other expenses.
Here's a look at how the numbers shake out: The average annual percentage yield for a traditional savings account is just 0.46% as of Oct. 16, according to the FDIC. That means after a year, a $1,000 deposit would earn $4.60 in interest.
But high-yield savings accounts offer APYs as high as 5% or 6%. After a year, the same $1,000 deposit would earn $50 in interest with a 5% rate.
"High-yield savings accounts pay 10 times what the average savings account pays, so the additional interest boosts your balance and itself earns interest from that point on," Greg McBride, Bankrate's chief financial analyst, tells CNBC Make It.
But before you move over your funds, be sure to do your research on the bank that's offering the high-yield savings account you're interested in. Make sure it's FDIC insured and check to see if there are any account fees or minimum balances you'll need to maintain in order to avoid charges.
The ultimate takeaway is this: High-yield savings accounts can be a safe and effective way to help your money grow faster than it would simply sitting in a regular savings account.
"There are plenty of high-yielding accounts available no matter where in the U.S. you live or how little you have in savings," McBride says. "You're just moving your savings to a place where it will be welcomed with open arms and higher yields."
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