What Is a High-Yield Savings Account?

A high-yield savings account is a type of savings account that can pay up to 15 times the national average of a standard savings account. The competition on savings rates has skyrocketed, creating a new category of high-yield savings accounts.

Key Takeaways

The interest rates on high-yield savings accounts can be 10 to 12 times higher than traditional savings account returns, and up to 15 times the FDIC national average.
Online banks tend to offer the highest rates.
Electronic transfers are easy to set up between a high-yield savings account and your checking account, even if at different banks.
When shopping for a high-yield savings account, compare factors such as initial deposit requirements, interest rates, minimum balance requirements, and fees.

What Makes a High-Yield Saving Account Different?

A high-yield savings account differs in a few ways, but there's one thing it has in common with traditional savings accounts that is important for all to know. Traditional savings accounts and their high-yield counterparts are insured by the Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Association (NCUA). When you open an account at a bank or credit union, all of your accounts combined are insured for up to $250,000.

Many brokerages offer cash management accounts (CMAs), which function similarly to high-yield savings accounts. The CMA usually offers a lower rate, but they do offer bill payment and ATM debit cards.

Interest Rates

The difference in interest between high-yield savings account rates and the national average is significant.

For instance, if you're holding $5,000 in a conventional savings account, and the national average rate is 0.46% annual percentage yield (APY), you would earn $23.05 over a year. If you instead put that same $5,000 in an account earning 4.50%, you'd earn $229 in interest.

The same can be said of high-yield checking accounts. However, checking accounts of this nature usually require you to hold a significant balance and use a debit card frequently.

Note

A high-yield savings account has a variable interest rate that can change over time. It also allows you to withdraw money when you need it. Your bank may have withdrawal limits, so check what that is first before withdrawing frequently.

Online Access

Some of the best savings interest rates are found at online banks, where the institution doesn't have to pay brick-and-mortar overhead. So, to earn significantly more interest with your savings, you may need to hold your savings account at one institution and your checking account at another.

Today's availability and execution speeds of electronic transfers between institutions make moving money between a checking account and a savings account relatively simple, even at different banks.

Additional Services

Unlike traditional brick-and-mortar institutions that offer a one-stop shop for all your banking needs, banks offering high-yield savings accounts typically limit their features or offer few or no other products. Many don't offer checking accounts, and few provide ATM cards. Generally, you can make electronic bank transfers or mobile check deposits for withdrawals and deposits.

Tip

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How to Use a High-Yield Savings Account

A high-yield savings account will likely comprise only a part of your overall financial portfolio. Consider how you'll best use the account with other accounts to fit your broader investment strategy.

Emergency Savings

Determine how much cash to set aside according to your goals and budget. For instance, if your savings account is serving as an emergency fund, consider depositing at least three to six months' worth of living expenses and keeping it there until you need it.

Goal-Oriented Savings

The strategy may differ if you use a high-yield account to save up for a large purchase, such as a house, a car, or a vacation. In that case, you may want to use a high-paying savings account to help you protect your principal while applying interest earnings to your savings goal.

Having multiple savings accounts may help you more easily progress toward goals and keep your funds organized toward specific goals. Many banks allow you to open multiple savings accounts and even give them personalized nicknames like "Car Fund," "Hawaii Vacation," or something else.

Earning Interest

You may want to open a high-yield savings account to keep cash. Most checking accounts don't pay any interest, and those generally offer meager interest rates, so moving extra funds into savings when you don't need them can provide a higher monthly interest payment.

However, a savings account's interest rate is variable. It can go up and down. If the Federal Reserve lowers the fed funds rate, you might not earn the same interest rate as last month. If you want a stable, fixed interest rate (in exchange for not touching it for a set period of time), consider opening a certificate of deposit (CD). Regardless of the account, remember that your interest earnings will be taxed each year.

What To Look for in a High-Yield Savings Account

Whether you're shopping for a high-yield account at a new bank or opening one at your current bank, compare options across the marketplace. Differences in interest rates and fees can add up over time, especially if you're keeping a relatively large balance in savings. Here's what to look for and compare.

1. Interest Rate

How much interest does the account currently pay? Is it a standard rate or an introductory promotional rate? Savings account rates are variable and can be changed at any time. However, some accounts will specify that the currently advertised rate is only available for an initial period of time.

2. Required Initial Deposit

How much money is required to open the account? Do you want to deposit the minimum deposit requirement? Some accounts have minimum or maximum initial balance thresholds for earning the promoted rate.

3. Minimum Balance Required

How much money are you required to keep in the account? Falling below the minimum deposit requirement can result in fees, which offset the interest rate earnings.

4. Fees

Does the bank or credit union charge any fees on this account? If so, how can you avoid them (maybe you always keep your balance above the minimum threshold)?

5. Links to Other Banks and/or Brokerage Accounts

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

6. Accessing Your Money

What additional options, if any, are available for withdrawing funds? Can you withdraw funds from savings using an ATM card?

7. Deposit Options

If you want to deposit checks into the account, does the bank have a smartphone app that offers mobile check deposits? Otherwise, can you mail checks by snail mail or deposit checks at a fee-free ATM?

8. Compounding Method

Banks can compound interest daily, monthly, quarterly, semiannually, or annually. More frequent compounding will theoretically increase your take-home yield. If you compare accounts by APY instead of annual interest rate, the compounding factor will already have been considered.

How to Open a High-Yield Savings Account

If your bank offers a competitive, high-yield savings account, it should be easy to open a new account. It will likely be possible with little need to enter personal information because you will already be verified with the institution.

If you're opening a savings account at a new institution, the process will be more involved but should still be simple. Almost all high-yield savings accounts can be opened online. You will likely need to complete an electronic application with key personal information. Have your driver's license, Social Security number, and primary bank account information on hand to transfer funds for your initial deposit.

Frequently Asked Questions (FAQs)

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

Online banks are offering the highest rates. Still, you may be able to open a high-yield savings account where you already bank. Compare rates and terms among several accounts.

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

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

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

Yes. Consumer banking customers can withdraw or transfer cash out of a high-yield savings account. Previously, the law allowed you to only withdraw up to six times per month from a savings account. That law is no longer in effect, but some institutions may have their own rules concerning withdrawals.

Which Is Better, a High-Yield Savings Account or a CD?

If you want certain returns, a CD is better as it offers a fixed interest rate over a specific period of time. You can even get a 3-year CD that pays the same rate for three years. A high-yield savings account's interest rate can go up or down, and there's no guarantee that the APY advertised today will still be in effect six months from now. If you want more access to your cash or are still building your savings, a high-yield savings account could be better. You can add to or withdraw funds anytime. With a CD, you'll generally pay an early withdrawal penalty if you need the cash. Consider carefully the pros and cons of certificates of deposit vs. savings accounts.

The Bottom Line

A high-yield savings account can be an ideal place to keep money you are not using in the short term, but that you want fairly easy access to. It offers higher returns than a traditional savings account and is low risk because your deposits are federally insured up to $250,000. Consider the pros and cons of high-yield savings accounts compared to your other options, such as investment accounts. Then, compare the terms of different accounts to find a high-yield savings account that best suits your goals and personal situation.