A growth savings account is a savings account that earns a significantly higher rate of interest than a standard saving account. This enhanced interest rate means your money will grow faster, which sounds of course like a good thing.
But are these accounts always a good bet? Important points to consider are:
• What is a growth savings account?
• How do growth savings accounts work?
• The pros and cons of a growth savings account
• How to open a growth savings account.
What Is a Growth Savings Account?
So, what is a growth savings account? Growth savings accounts are similar to regular savings accounts, except they tend to earn more, even 20 times as much, interest than traditional savings accounts. Depositing money in a growth savings account (which may also be called a high-yield savings account) makes it easier to grow savings safely, while keeping those funds accessible.
You may get the best interest rate on a growth savings account at an online bank or credit union versus a traditional, or bricks-and-mortar, bank. However, even at their best, these savings accounts typically don’t have the very high growth of, say, a well-chosen stock portfolio, the kind that could have you living off investment interest.
How Do Growth Savings Accounts Work?
Growth savings accounts function in a similar manner to regular savings accounts. You open the account, put some funds in, and can continue to add to the money as you like, all the while earning interest. The difference is you’ll earn more interest, thanks to their higher rates. This may make it one of the more appealing places to put your cash, especially when saving for short- or medium-term goals, such as building up an emergency fund or taking a European vacation.
As you shop for a growth savings account, you’ll likely find a broad range of rates. Odds are a traditional bank will offer an interest rate well below 1.00% (perhaps 0.02%) at press time. An online bank with growth savings accounts may offer rates of 1.00% or more.
Worth noting: Any interest earned in a growth savings account or a regular savings account may need to be reported as taxable income.
Also, at some financial institutions, you may be limited to only six withdrawals or transfers a month, as is the case with standard savings accounts. For each following withdrawal, you could face a fee or even have your savings account closed or converted into a checking account. A number of banks have relaxed this rule; check with yours to see if they still cap the number of withdrawals per month.
Pros of a Growth Savings Account
Here are a few examples of advantages that come with opening a growth savings account.
Higher Interest Rates
Because growth savings accounts can offer higher interest rates, the money held in a growth savings account tends to grow faster than money held in traditional savings accounts that earn lower interest rates. When determining what is a good interest rate, also look into minimum balances. You may see that the more money you put on deposit, the higher the rate you earn can be.
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Accessible Form of Growth
Keeping money in a savings account is a great way to earn interest. It also means your money stays very accessible, which wouldn’t be the case if you invested in the stock market or opened a certificate of deposit (CD), which should be left untouched for a specific term.
Good Way to Build an Emergency Fund
Because these funds are fairly accessible, a growth savings account is a great place to build an emergency fund. That way, the emergency fund can continue to grow until it might be needed.
Cons of a Growth Savings Account
There are also some downsides to growth savings accounts worth keeping in mind before opening one.
Limited Growth Opportunity
Yes, growth savings accounts do earn more interest than traditional savings accounts. However, when considering your long-term savings options, there may be more strategic investments that can enhance growth. If, for instance, you’re saving for retirement, which is a few decades away, you might take a look at the stock market for growth.
Growth savings accounts generally provide easier access to funds than keeping money in investments. That said, you may only be able to make six withdrawals or transfers per month, or else you risk running into fees or having your account closed or converted to a checking account. Check, though, with your bank about whether this six-transaction limit still holds true. Many financial institutions have abandoned this guideline over the last couple of years.
Earnings Are Taxable Income
The interest earned in a growth savings account can count as taxable income. Compare this to the growth that occurs in a Roth Individual Retirement Account (IRA). There, you won’t pay any income tax on investment earnings.
|Pros of Growth Savings Accounts||Cons of Growth Savings Accounts|
|Higher interest rates||Accessible form of growth|
|Good way to build an emergency fund||Limited growth opportunity|
|Possible withdrawal limits||Earnings are taxable income|
Recommended: What is a Roth IRA and How Does it Work?
Choosing a Growth Savings Account
When you’re looking for ways to earn more interest on your money, a growth savings account might be a good option. Shop around to find the best fit for your needs. Here are a few factors to keep in mind when looking for a new growth savings account:
• Interest rates
• Minimum balance requirements
• Account features
• Mobile app
• Other product and service offerings
It’s important to note that a lot of growth savings accounts come from online banks that don’t have in-person banking locations. Keep that in mind if you prefer to manage your account in-person.
How to Open a Growth Savings Account
While each banking institution will have its own process, opening a growth savings account typically includes the following steps:
• Fill out the application. When filling out a growth savings account application, you’ll usually provide details like your name, Social Security number, proof of address (say, from a utility bill), and government-issued photo ID.
• Choose the account type. There may be different savings account types, such as an individual account or a joint account (to share with a spouse or family member). Select the kind that’s right for your needs.
• Designate beneficiaries. It’s important to choose a beneficiary for your growth savings account, just as you might select a beneficiary for a 401(k) plan. This is the person who would receive the account’s funds if your were to become incapacitated or pass away.
• Deposit funds. Some banks require a minimum initial deposit, so you may need to make that deposit to open the account.
• Create login information. If the growth savings account is set up through an online bank, it will be necessary to create login information such as a username and password for the online account. Be sure to create a complex password with at least one capital letter, numbers, and symbols.
While there may be another step or two in some situations, that’s how to open a bank account.
Everyone wants to earn more interest on their savings account. Growth savings accounts can do just that vs traditional savings accounts since they tend to have higher interest rates. These accounts can be a good way to increase the funds in your savings faster. They are not, however, for everyone nor for all situations. In some cases, investing can help earn more money on savings and help you achieve long-term financial goals.
If you are looking for a new growth savings account, see what SoFi offers. We’re dedicated to helping you bank smarter. Here’s a great example: When you open a new bank account online with direct deposit, you’ll earn a super competitive up to 3.25% APY and pay zero account fees. That means your money grows faster and won’t be eroded by miscellaneous charges. You’ll also get access to your paycheck two full days early.
If you are looking for a new growth savings account, see what SoFi offers. We’re dedicated to helping you bank smarter. Here’s a great example: When you open a new bank account online with direct deposit, you’ll earn a competitive APY and pay zero account fees. That means your money can grow faster and won’t be eroded by miscellaneous charges. You’ll also get access to your paycheck two full days early.
How do growth savings accounts work?
Growth savings accounts function similarly to traditional savings accounts. The only difference between these account types is that growth savings accounts tend to have higher interest rates.
What does “growth account” mean?
A growth account — also known as a high-yield account — offers a higher interest rate than traditional savings accounts. This higher interest rate leads to more growth on deposited funds.
How much interest does a growth savings account earn?
Interest rates change all the time, so it’s hard to nail down an exact number on what to expect with a growth savings account. That being said, growth savings accounts typically offer an annual percentage yield (or APY) of 1.00%, and sometimes even more than 2.00%.
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SoFi members with direct deposit can earn up to 3.25% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 2.50% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 11/3/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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