Why college students should open a high-yield savings account

Saving money as a college student is challenging because, let’s face it, the typical student budget is pretty tight. Between classes and homework, students have little time to earn a significant income. And the money that students do have in their bank account is typically eaten up by textbooks, school fees, rent, food and their social life.

But as challenging as it may be, knowing how to manage and save money is an essential lesson students should learn. By building healthy money habits during college, students can form a solid financial foundation for their future.

One such habit would be to create a budget that details how much money you make versus how much money must go towards your monthly expenses. This exercise will help you determine how much money is available to set aside for savings each month.

Another smart money move is to put that money in a high-yield savings account, a valuable tool for young adults to maximize their savings with little sacrifice. These accounts offer three critical benefits for students:

1. Higher yields
2. Perfect for an emergency fund
3. Earn more with no additional risk

HOW OLD DO YOU HAVE TO BE TO GET A CREDIT CARD?

1. Higher yields

The simple truth is, students who save their money in a traditional savings account are leaving money on the table.

According to Lawrence Soloman, a client adviser for Mercer Advisors, "college students should be interested in high yield savings accounts for one simple reason: they have higher yields than traditional bank accounts, money market funds or other short-term investments."

The interest you earn with a high-yield account significantly outpaces what you would make in a traditional savings account. Currently, the average annual percentage yield (APY) for all savings accounts (high-yield and traditional) is 0.04%, according to the Federal Deposit Insurance Corporation (FDIC). However, the APY for savings accounts with most major banks is a mere 0.01%.

By contrast, high-yield savings accounts currently come with APYs around 0.40%. These figures disprove one of the biggest myths about high-yield savings accounts — that you’ll get your best rate from your own bank. And since high-yield savings accounts compound interest daily, you’re earning interest every day and you don’t have to start with much to see positive results over time.

HOW TO PAY FOR GRADUATE SCHOOL: 4 WAYS TO FUND YOUR DEGREE

2. Perfect for an emergency fund

College students are wise to begin building an emergency fund to cover unexpected expenses.

"FDIC-insured high-yield savings accounts are a great place for college students to start an emergency fund," said Ryan McPherson, CFP and director of coaching and advising at SmartPath Advisors.

"Not saving an emergency fund in college is the rough equivalent of playing Russian roulette with your finances," McPherson added. "Emergencies and unexpected non-emergency expenses will happen, and all of these things cost money, usually more than anticipated. Saving up an emergency fund is critical to avoid having to put unplanned expenses on a credit card."

WHAT CREDIT SCORE DO YOU NEED TO GET A STUDENT LOAN?

3. Earn more with no additional risk

Unlike risking your money in the stock market, you don’t inherit risk when you put your money away in a high-yield savings account. That’s because FDIC insurance protects each account up to $250,000 should anything happen to your bank.

Even when the stock market is performing well, there’s always the possibility of a downturn in the market which can jeopardize money you may need for tuition, books or an unplanned emergency.

By saving in an FDIC-protected high-yield account, you can count on your money to earn interest each day and that it will be there when you need it.

Final thoughts

In the wake of the coronavirus pandemic, the Federal Reserve enacted emergency rate cuts. In response, most banks have likewise cut their savings yields. The current rates won’t last forever, though it may take some time before high-yield interest rates go back up in 2021.

What’s important is to start saving now. College is the best time for a young student to consistently invest in a savings account, as it is an effective strategy for accumulating wealth and can help you reach your savings goals.

7 OF THE BEST PRIVATE STUDENT LOANS IN 2021

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.