High Interest Savings Accounts

For millions of investors and employees alike, the interest rates on standard savings accounts just aren’t enough. Pushed down to low levels through a combination of government regulations and a banking industry desperate to keep its lending activity on the go, today’s interest rates are closer to trivial sums than they are a figure to build a business – or simply an investment – upon.

Because of this, many would-be investors are going elsewhere. The banks are being left behind, with a great deal of investment capital moving into bonds, stocks, and currencies – all of which offer a greater rate of return, albeit with a greater amount of risk, than their bank counterparts. It isn’t a complete exodus, but it’s certainly been a move away from savings accounts and CDs.

But there’s a solution – one that’s backed by both the full confidence of a bank and the power of the Federal Deposit Insurance Corporation. Called a ‘high interest savings account,’ these accounts are every bit as safe, secure, and dependable as a standard bank account, but have the potential to give a much more lucrative return to account holders through a variety of different bank-end investments.

Before we delve into the top high interest savings accounts on the market today, it’s important to look at how a standard savings account generates money for the bank that offers it. Most savings accounts are used to finance loans, all of which are given out directly from the bank that accounts are stored with. This is direct lending, and it’s one of the biggest types of bank-based lending.

As the accounts are tied to loans given directly from the bank itself, this form of lending is easy to keep track of and relatively low-risk for both the bank and the account holders. As such, it’s one of the only forms of savings account-backed lending allowed. Various regulatory bodies in the United States and abroad ensure that banks only use this type of financing with their savings balances.

This is for a variety of reasons, almost all of which are based around the concept of minimizing risk and increasing accountability. As savings accounts are backed by the FDIC, it’s important for banks to keep their risk levels low. This is partly to blame for the low interest rates offered on these types of savings accounts, and the relatively low returns offered out to most savings account holders.

A high-interest savings account, unlike a standard savings account, earns its interest from a variety of different sources. While a standard savings account allows the bank a set amount of capital for a range of internal investments, a high-interest account can often be used to finance external loans or investments. This is much more risky, yet significantly more rewarding for all parties involved.

As an example, a high-interest savings account could be used to finance loans that are processed outside of the bank itself. This could include brokered mortgages – as was the case for subprime mortgages recently – or even vehicle, boat, or other property financing. It could also mean many external personal loans, financing contracts, and other loans offered indirectly by the bank.

In many cases, it also means a range of investments in stocks, commodities, and bonds. As high-interest savings accounts aren’t bound by the same restrictions as many other accounts, they have the potential to be used in riskier, high-yield stock investments. Many banks offer a high-interest savings account that’s partially invested in stocks, offering high interest rates for account holders.

There are, of course, risks to this type of strategy, particularly for the bank that’s involved in the account’s related investments. Investments can sometimes fail, in which case the bank may take losses in their investment activities. In this case, the balance of the account is often backed up by external insurers, or in some cases, through government-backed balance insurance programs.

There are other safeguards on these accounts, almost all of which are designed to protect the profit margins that many banks and lenders expect. While standard savings accounts may be subject to an assortment of light fees for withdrawals and transfers, the fees on high-interest accounts tend to be significantly higher. This is done to increase overall profits, and to encourage long-term balances.

There’s also a ‘lock in’ interest rate clause on many of these accounts, which limits high-interest earnings to account holders that deposit their money for a specific amount of time. In this way, a range of high-interest savings accounts are much like CD accounts. In order to maximize interest earnings, an account holder will need to deposit their money for an extended period of time.

For many people, these are negative aspects of a high-interest savings account. However, given the immense interest rates seen on these accounts – many of which substantially beat out their standard account counterparts – it’s often worth using one. As with any other form of investment, it’s a choice that’s yours alone, and it deserves a great deal of careful thought and consideration.

Despite their downsides, their hefty fees, and their inherent risks, a high-interest savings account is often a sound financial move. They’re a smart and aggressive investment, proving worthwhile in an economic growth period. At the same time, they’re often the type of reliable and accessible account that newbie investors, hardworking employees, and financially secure families need most.

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