It is valuable to have savings. If you have extra cash in an emergency fund, it'll be easier to pay for unanticipated expenses that come your way. The recommended amount to save varies from person to person, as everyone's financial situation differs.
But for many people, $20,000 is a sizable emergency fund goal that will go far. If you have a large chunk of savings set aside, make sure you keep it in a bank account that earns interest.
Curious how much interest you can make off $20,000? Below, I'll explain how much you can earn with this sum by keeping your cash in a high-yield savings account.
Maximize your earnings with a high-yield savings account
Before opening a savings account, check the annual percentage yield (APY). Banks use this to describe the returns an account holder can expect by keeping their cash in a savings account for one year. Many brick-and-mortar banks offer low APYs, so it's common to see rates as low as 0.01% APY. At that meager rate, you won't earn much at all.
But if you open a high-yield savings account, you'll likely be offered a much higher APY. Many online banks offer 4.00% APY or higher for these accounts. How much interest will you earn by keeping $20,000 in a high-yield savings account? It could be more than you think.
$20,000 in savings accumulates this much in interest
To determine how much interest you'll earn, multiply your initial deposit ($20,000) by the APY your bank account offers. Doing this will show you how much you'd make if you kept your cash in the bank for one year.
For the following calculations, I went with a 0.01% APY for a standard savings account and a 4.50% APY for a high-yield savings account. The bank accounts on our list of the best high-yield savings accounts have APYs ranging from 4.15% to 5.05% -- I settled somewhere in between.
These calculations assume a $20,000 deposit with no additional deposits made to your account:
| Bank account type | Interest earned after one year |
|---|
| Savings Account, 0.01% APY | $2.00 |
| High-Yield Savings Account, 4.50% APY | $900 |
Source: Author's calculations
As you can see, there is a significant difference in earnings. Keeping a large sum of cash like this in a high-yield savings account would be worthwhile if you hope to maximize the interest you earn.
Compound interest is on your side when it comes to savings
The calculations above show how much interest you can earn by keeping $20,000 in the bank for a year. But you can make more money thanks to compound interest, which is interest that you earn on interest. The longer you keep your money in your savings account, the more you earn.
To give you an idea how you can benefit from compound interest when you have a savings account, here's how much money you'll make if you keep $20,000 in a high-yield savings account for anywhere from one to five years. Again, the following calculations assume you make no additional contributions beyond the initial deposit.
Here's a breakdown:
| Year | Starting balance | Interest earned | Ending balance |
|---|
| 1 | $20,000 | $900 | $20,900 |
| 2 | $20,900 | $940.50 | $21,840.50 |
| 3 | $21,840.50 | $982.82 | $22,823.32 |
| 4 | $22,823.32 | $1,027.05 | $23,850.37 |
| 5 | $23,850.37 | $1,073.27 | $24,923.64 |
Source: Author's calculations
That's $4,923.64 -- nearly an additional $5,000 earned in five years, assuming the APY doesn't change. However, APYs can and do change, so your APY likely won't stay at the same rate for five years.
Earn more interest with no extra work
Considering the rates offered, now is an excellent time to open a high-yield savings account. By stashing your cash in a bank account with a higher APY, you can earn more interest without doing any work. Most bank accounts take only a few minutes to open, so it's worth the effort. You can improve your personal finances by boosting your bank account balance with earned interest.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
FAQs
By keeping your extra savings in a high-yield savings account, you may be able to earn more interest. If you keep $20,000 in a high-yield savings account for one year at 4.50% APY, you can make $900 from interest. The longer you allow your savings to sit in your account, the more interest you'll earn.
How much will $5000 make in a high-yield savings account? ›
Shopping around for a top APY means you can earn 10 to 12 times more than the national average rate, which is less than half a percent. $5,000 in one of today's best high-yield savings accounts could earn as much as $136 in just six months—compared to about $11 with an average rate.
How much return on a 20K investment? ›
It depends on the investment vehicle you used to invest the £20,000. High-yield savings accounts and cash ISAs have low interest rates (0.5% to 5%), while stocks and shares ISAs have higher returns on investment (9.6% to 13.5%).
How much will 10k make in a high-yield savings account? ›
If you have $10,000 to invest, here's what your earnings would be at different interest rates: After one year with a regular account at 0.42%: $10,042.00. After one year with a high-yield account at 4.50%: $10,450.00. After one year with a high-yield account at 5.00%: $10,500.00.
Can you ever lose your money with high-yield savings account? ›
Are high-yield savings accounts safe? High-yield savings accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation or the National Credit Union Administration. So your money is as safe as it would be in a traditional savings account.
Can you live off of a high-yield savings account? ›
It's possible, but it isn't realistic for everyone. Living off of interest relies on having a large enough balance invested that your regular interest earnings meet your salary needs. Rest assured that you don't need to earn a million dollar paycheck to reach your goal.
How much do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Where is the best place to invest $20,000? ›
Invest in stocks and shares
If you have no immediate need to access your £20k and you're prepared to accept a degree of risk, you could consider investing in the stock market. This minimum investment timeframe for investing in stocks and shares is at least five years.
Is there a catch with high-yield savings? ›
What are the cons of a high-yield savings account? Variable rates. Interest rates on these accounts can and do fluctuate, which means the APY you started with could potentially drop. Keep your eye on such changes and remember that the money is yours; at any time, you can move it to a bank that offers a higher rate.
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
What are the cons of a high-yield savings account? ›
Cons of high-yield savings accounts
- Withdrawal limits. All savings accounts used to charge customers fees if they made more than six monthly withdrawals. ...
- Withdrawals might require a few extra hoops. ...
- Minimum balance requirements. ...
- Rates fluctuate. ...
- Not a good fit for long-term savings.
If you keep $30,000 in a high-yield savings account for one year at 4.50% APY, you can make $1,350 in interest. The longer you let your extra cash sit in your account, the more interest you'll earn.
How much return can you expect from a high-yield savings account? ›
A high-yield savings account is a type of federally insured savings product that earns rates that are much better than the national average. They can earn around 5%. By comparison, the national average rate is 0.45%.
Is $20,000 good for savings? ›
Having $20,000 in a savings account is a good starting point if you want to create a sizable emergency fund. When the occasional rainy day comes along, you'll be financially prepared for it. Of course, $20,000 may only go so far if you find yourself in an extreme situation.
What happens if you put 50000 in a high-yield savings account? ›
How much of a difference does this make? If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.
