What Is a High-Yield Savings Account?

High-yield savings accounts, a unique type of savings account, offer interest rates that are significantly higher, up to 10 to 12 times, than the national average for standard savings accounts. This means your money can grow faster, making it an attractive option for those looking to maximize their savings.

Traditionally, people have maintained their savings account with the same bank where they hold their checking account for easy money transfers. However, with the emergence of online banks and the increasing number of traditional banks offering online accounts, competition for savings rates has intensified, creating a new category known as “high-yield savings accounts.”

Key Takeaways

• Interest rates on high-yield savings accounts can be 10 to 12 times greater than those of traditional savings accounts.
• Online banks often provide the best rates.
• Setting up electronic transfers between a high-yield savings account and your checking account is simple, even if they are held at different banks.
• When considering a high-yield savings account, compare initial deposit requirements, interest rates, minimum balance requirements, and fees.

High-Yield Savings Differences

The difference in interest between high-yield savings account rates and the national average is substantial. For instance, if you have $5,000 in a standard savings account with the national average rate of 0.39% Annual Percentage Yield (APY), you would earn $19.50 annually. In contrast, putting that same $5,000 in a high-yield savings account earning 4.5% would generate $225 in interest. This significant difference can make a real impact on your savings.

To earn substantially more interest with your savings, you may need to keep your savings account at one institution and your checking account at another. The availability of electronic transfers between institutions today and the speed at which these transfers can occur make moving money between accounts relatively simple and hassle-free, even if they are with different banks.

Unlike traditional banks, which offer a comprehensive range of services, banks that offer high-yield savings accounts generally limit their offerings to a few products. Many do not offer checking accounts or ATM cards. Withdrawals and deposits are typically conducted via electronic bank transfers or mobile check deposits.

One crucial similarity between traditional and high-yield savings accounts is the federal insurance provided by the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions. In case of bank or credit union failure, your deposits are protected up to $250,000 per account.

How to Use a High-Yield Savings Account

A high-yield savings account will likely be a component of your financial strategy. Consider how this account will work with your other accounts to fit into your broader investment plan. Determine how much money you should set aside based on your financial goals and budget. For example, if your savings account is an emergency fund, you should deposit enough to cover three to six months’ living expenses.

The strategy could be different if you use a high-yield savings account to save for a significant purchase, such as a home, car, or vacation. In that scenario, a high-yield savings account, with its flexibility and ability to protect your principal while allowing your interest earnings to contribute to your savings goal, can be a powerful tool in your financial arsenal.

You may also open a high-yield savings account to store cash. Most checking accounts don’t pay interest, and those that do usually offer meager rates, so transferring extra funds to a savings account when you don’t need them can result in a higher monthly interest payment. Remember, though, that your interest earnings will be taxed annually.

Many banks allow you to open multiple savings accounts and even assign them personalized names (e.g., “Car Fund,” “Hawaii Vacation,” etc.). Alternatively, you can open high-yield savings accounts at multiple top-paying institutions.

Multiple savings accounts can help you manage your goals and organize your funds for specific purposes, providing a sense of control and organization in your financial planning.

What To Look for in a High-Yield Savings Account

Whether you’re considering opening a high-yield savings account at a new bank or with your current bank, comparing options across the marketplace is essential. Differences in interest rates and fees can accumulate over time, mainly if you maintain a large balance in savings. Here’s what to look for and compare:

Interest Rate

How much interest does the account currently offer? Is the rate standard, or is it an introductory or promotional rate?

Savings account rates are generally variable and can change at any time. However, some accounts may specify that the advertised rate is only available for an initial period. Additionally, check whether there are minimum or maximum balance requirements to qualify for the promoted rate.

Required Initial Deposit

How much money is necessary to open the account? Are you comfortable with meeting the minimum deposit requirement?

Minimum Balance Required

How much money must you keep in the account? If you fall below the minimum balance, you might incur fees, which could negate the interest earnings.

Fees

Does the bank or credit union charge any fees on this account? If so, what steps can you take to avoid them (e.g., maintaining a balance above the minimum threshold)?

Links to Other Banks and/or Brokerage Accounts

Will the bank allow you to link your high-yield savings account with deposit accounts at other banks or brokerage firms? Are there any restrictions on linking multiple accounts, or is there a waiting period for new accounts?

Accessing Your Money

What options are available for withdrawing funds? Can you access your money through an ATM card?

Deposit Options

If you plan to deposit checks into the account, does the bank offer a smartphone app with mobile check deposit capabilities? Alternatively, can you mail in checks or deposit them via an ATM?

Compounding Method

Banks may compound interest daily, monthly, quarterly, semiannually, or annually. More frequent compounding theoretically increases your yield. If you compare accounts by APY instead of the annual interest rate, the compounding factor is already considered.

How to Open a High-Yield Savings Account

Opening a new account should be straightforward if your current bank offers a competitive, high-yield savings account. The process will require minimal additional personal information since the institution has already verified you.

Opening a savings account at a new institution may be more involved but should still be relatively simple. Almost all high-yield savings accounts can be opened online. You will likely need to complete an electronic application with essential personal information. Have your driver’s license, Social Security number, and primary bank account information ready.

Where Can a Consumer Find a High-Yield Savings Account?

Online banks offer the highest rates, but you might also find a high-yield savings account at your current bank. Compare the rates and terms across several accounts to find the best option.

What Are the Main Things To Look at in a High-Yield Account?

Research and compare factors such as the required initial deposit, interest rates, minimum balance requirements, fees, links to other banks and/or brokerage accounts, access to your funds, deposit options, and the compounding method.

Can You Withdraw Money From a High-Yield Savings Account?

Yes, consumers can withdraw or transfer funds from a high-yield savings account. Previously, the law limited savings account withdrawals to six per month, but that restriction was lifted in 2020.

The Bottom Line

A high-yield savings account can be an excellent place to store money you don’t need immediately but want relatively easy access. It offers higher returns than a traditional savings account and is low-risk, as your deposits are federally insured up to $250,000. Consider the pros and cons of high-yield savings and other options, such as investment accounts. Then, compare the terms of different accounts to find the best fits your goals and personal situation.