Personal Finance

5 min read

September 22, 2020

High Yield Checking Accounts Explained | Why You Need One Today

The pros of interest bearing checking accounts versus savings accounts, CDs and much more

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Checking accounts, the mainstay of retail banking the world over, aren’t exactly a new innovation. They have existed all the way since ancient Mesopotamia, Greece, and Rome in one form or the other. Landowners and businessmen would write slips of paper passing one bit of their property or riches to another in exchange for work done or more property. In mercantile Holland of the 1500s, traders used checks to store their money in Dutch accounts instead of risking it on the travel home.

In the US, paper checks were first used by John Hancock, the colonial merchant with the recognizable signature, to transfer large funds at a distance. Because they are made out of paper and had to make the long journey from the payee’s bank to the writer’s bank to fulfill their function, they weren’t used for small purchases. Back then, the writer’s bank was responsible for verifying that the signature was authentic before paying the check, which might work if the writer had a signature like John Hancock, but for the rest of us? Good luck. As they became more commonplace and people used them for lower-value purchases, most banks didn’t bother to verify the signatures and hoped for the best. Check forgery and fraud increased well into the billions of dollars per year in the banking industry.

We now largely use electronic checking and the Automated Clearing House (ACH) to direct debit from a customer’s checking account into a merchant’s business bank account, with the help of a payments processor. Checks are transmitted electronically, making transactions quicker, safer, and easier — no signature test required.

Even with all of those big changes over time, we’re still more likely to hold a checking account over any other account available. But when it comes to growing your money, checking accounts get a bad rep.

A traditional checking account is a deposit account held at a financial institution that allows withdrawals and deposits. The average interest rate is 0.04%, and as such, they offer no growth. In fact, banks make quite a bit of profit from assessing fees on checking accounts, so they may actually cost you money to use. A checking account makes sense for most of us since they’re super liquid, offer real-time access to our cash, and accept direct deposit of our paychecks and other transfers. High yield checking accounts function just like regular checking accounts, with one exception: you earn interest.

High Yield Checking Versus High Yield Saving Accounts

Saving accounts certainly have their place in financial planning. There was a time when you could expect to earn 5–6% interest on the money sitting in your savings account…but those days are long gone. The current average interest rate for savings accounts is 0.06%. With the average inflation rate for the past ten years set at 1.8% it just doesn’t make financial sense!

On top of that, increased regulations limit you to six pre-authorized, automated, or telephone transfers or withdraws during any given month. And if you’re required to have a minimum balance and your account drops below that number? The fees involved may outweigh any potential benefits of having the account at all. The writing is clear: a savings account is not meant for growth!

High Yield Checking Accounts Versus Money Market Accounts

A money market account is essentially a savings account with some checking features, like paper checks or debit cards. However, they have a very strict limit on transactions per month. There was a time when they offered higher interest rates than regular savings accounts, but these days they’re pretty similar. The average money market account interest rate is about 0.1%, which means that if you save $1,000 per month for one year, at the end of the year you will have earned about $5 growth for a total of around $1,005.

A money market account can make sense for you if you like to keep a high average balance in your account, as they often require that five-figures are held in the account at all times.

High Yield Checking Accounts Versus Certificates of Deposit

A certificate of deposit, or CD, is a federally insured savings account that has a fixed interest rate and fixed date of withdrawal, known as the maturity date. Think of them as a forced savings account: once the money goes in, there’s no way to get to it without paying a fee. Interest rates vary based on the timeframe of the CD, but the average rate for a 1-year CD is 0.4%.

If you deposit $1,000 you will have about $1,022. at the end of the year. A CD makes sense for savers who have a hard time keeping their hands out of the cookie jar, but what they make up for with a tiny bit more interest they give up in access.

High Yield Checking Accounts Versus Investing

Investing is essentially committing your cash with the expectation of getting it back in full plus growth. The most common way that people in the US invest is through the stock market, via their retirement accounts, but you can also invest in funds, bonds, business ventures, real estate, and art. Because there are so many ways to invest it’s hard to circle in on an average rate, but historically the US stock market has returned 10% growth to its diversified investors.

Investing makes sense for everyone but is not advised for short term growth. Additionally, your invested funds are not meant to be accessed for day-to-day expenses, meaning poor liquidity. Can you imagine trading in a few shares of stock in exchange every time you need to pay rent? No way.

Why a Checking Account is Right for you

While there is no one-size-fits-all financial product, a high yield checking account comes pretty close.

Nicole Sara Sivens
Nicole Sara Sivens
A data-driven strategist, Nicole specializes in financial writing and creative consulting for some of the world's largest brands

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