Want to Grow Your Savings Without Cutting Spending? You Need One of These

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Pretty much everyone is familiar with the benefits of saving, but actually realizing those benefits can be challenging. Even if you have the best intentions, just being alive is expensive, especially with the high inflation we've seen over the last few years.

The conventional money-saving advice is to slash your expenses and put the extra money aside. That doesn't work if you've already pared your budget down to the essentials. So here's another thing you can try to boost your savings account balance.

Put your money to work for you

The right financial accounts can help you increase your wealth over time. Conventional savings accounts have two major drawbacks that make them a poor choice to house your savings. First, they often charge monthly maintenance fees. There are usually ways to waive them -- for example, by maintaining a certain minimum balance. But if you can't meet these requirements, your savings account could cost you money each month.

The bigger problem is the APY. This dictates how much you earn in interest on your savings each month. Typical brick-and-mortar savings accounts offer around 0.01% APY. That would only earn you $1 a year on a $10,000 deposit. In the best-case scenario, your balance remains relatively stagnant apart from your own contributions.

That's not the case with high-yield savings accounts, though. Usually available through online banks, these accounts are known for having few fees and high APYs. Some of the best savings accounts have rates close to 5.00% APY. That could add $500 to a $10,000 initial balance in a year.

The best part is, you'll earn interest on your interest over time. So say, for simplicity's sake, that you have a high-yield savings account that earns 5.00% APY for the next two years. You'd earn $500 in the first year on a $10,000 deposit. Then, in your second year, you'd earn $525 -- $500 more on the initial $10,000 plus $25 on the $500 from the first year.

A few caveats

High-yield savings accounts are a much better option than traditional brick-and-mortar savings accounts for most people, but there are a few limitations. First, your interest rate isn't locked in. Our example above gives you a general idea of how compound interest works with your savings account, but it's not realistic because interest rates are expected to drop in the coming months.

However, even if rates do fall, you'll still earn a more competitive APY with a high-yield savings account than you will with a traditional bank.

Second, even the best online savings account interest rates won't beat inflation in the long run. If you hope to grow your buying power, investing is the way to go. You should only do this with cash you don't plan to spend in the next five years because the stock market can be volatile in the short term.

Third, your savings account interest is taxable, so be prepared to report this when you file your return. You may not get a tax form from your bank, depending on the amount you've earned throughout the year, but you're still responsible for reporting it.

How to choose a high-yield savings account

APY is most people's primary consideration when choosing a high-yield savings account, but it's not the only one. You should also weigh the following factors:

• Fees: Maintenance fees on these accounts are uncommon, but they may have other charges. Review the account's fee schedule and make sure you're comfortable with it.
• Accessibility: Think about how you plan to use the account and make sure you're happy with the deposit and withdrawal options.
• Mobile tools: You'll probably access your account through your computer or smartphone most of the time, so check its app ratings to see how user-friendly and well-liked it is.
• FDIC insurance: Most banks should have this, but verify that yours has FDIC insurance so your money is protected against bank failure (up to $250,000).

If you have any questions about a particular account, reach out to the bank directly. Then, when you're ready, you can apply online and transfer funds from an external bank account.

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