Guide to High-Yield Savings Accounts

With interest rates still high, now may be a good time to evaluate your savings strategy. If your extra cash is currently sitting in the bank earning at or close to 0%, you may want to consider moving it into a high-yield savings account.

A high-yield savings account is a type of federally insured savings vehicle that offers substantially higher interest rates than the national average of traditional savings accounts. For example, with high-yield savings accounts right now, you can often earn 5.00% annual percentage yield (APY), versus the national savings average of 0.39%.

Here’s what you need to know about high-yield savings accounts, how they work, their pros and cons, and how to find the best place to park — and grow — your savings.

Key Points

• A high-yield savings account is a type of savings account that pays significantly higher interest than traditional savings accounts. Rates are variable and fluctuate depending on the Federal Reserve’s benchmark rate.

• Online banks have some of the best interest rates because they have lower overhead costs than brick-and-mortar institutions, so they can pass those savings on to their customers in the form of better rates.

• These accounts are low risk because they’re insured in the same way as traditional savings accounts by the Federal Deposit Insurance Corporation and the National Credit Union Association.

• They’re ideal for short-term savings goals, such as paying for a vacation, buying a car, or saving for a down payment on a home.

• Things to check for when comparing high-yield savings accounts include interest rates and fees, as well as any requirements for a minimum initial deposit or maintaining a minimum balance.

What Are High-Yield Savings Accounts?

A high-yield savings account is a savings product that earns a higher interest rate than a traditional savings account. The interest rate offered by these accounts is typically noted as APY. The higher the APY on a particular savings account, the faster your money grows.

Whether you choose a traditional or an online bank, the money in a high-interest savings account is federally insured and easily accessible. As a result, this type of savings account can be a good place to sock money away to meet financial goals, such as building an emergency fund, buying furniture, buying a car, paying for a wedding, or saving up for a down payment on a home. 

A high-yield savings account can also be a good place to temporarily stash a windfall, such as a tax return, a work bonus, or an inheritance, until you determine where best to invest those funds.

Keep in mind, though, that even high-interest savings account rates generally don’t outpace inflation, which means this type of savings product may not be ideal for long-term savings goals, such as a child’s college education or your retirement.

How Do High-Yield Savings Accounts Work?

High-yield savings accounts work in a similar way to traditional savings accounts. They allow you to make regular deposits, as well as access your money via withdrawals or transfers to linked bank accounts. 

As with other savings accounts, you may be subject to monthly withdrawal limits. While federal rules restricting savings account owners to six withdrawals per month have been suspended, banks and credit unions can still cap the number of withdrawals you’re allowed to make and charge fees if you exceed the max.

You may be able to open a high-yield savings account where you already bank, but the highest rates are often available from online banks. Electronic transfers are generally easy to set up between a high-yield savings account and your checking account, even if you hold them at different banks. 

Pros and Cons of High-Yield Savings Accounts

Like any savings vehicle, high-yield savings accounts have both advantages and disadvantages. Here’s a look at the pros and cons to help determine if a high-yield savings account is right for you.

Pros

• Higher interest rates: APYs offered by high-yield savings accounts can be up to 15 times higher than the APYs offered by traditional savings accounts. This allows your money to grow faster.

• Low risk: The Federal Deposit Insurance Corporation or the National Credit Union Association insures high-yield savings accounts in the same way as traditional savings. This means you’ll receive up to $250,000 per account holder, per institution, should the bank or credit union fail.

• Low costs: High-yield savings accounts are typically available with online banks, which generally don’t charge monthly maintenance fees. This is due to the fact that they have lower overhead costs than brick-and-mortar banks and will often pass those savings on to their customers in the form of low fees (and better rates).

• Ideal for short-term savings goals: High-yield savings accounts can be a good way to save for things you want to pay for in the next few months to a year, such as a vacation or wedding. If you were to put this money into a risky investment — for example, stocks — there’s a chance you could lose money in the short term. 

Cons

• Interest rates fluctuate: The APY that a high-yield savings account offers when you sign up can change at any time. These rates are variable and often go up or down in accordance with the Federal Reserve changing its benchmark interest rate.

• More requirements: High-yield savings accounts may have stricter requirements than traditional savings accounts. Some high-interest savings accounts may require a relatively large deposit to open an account. They may also require you to keep a minimum balance or risk incurring fees or losing the higher rate.

• Time lag on withdrawals: If your high-yield savings account isn’t at the same institution as your checking account, transfers can take a day or two to complete.

• Not ideal for long-term goals: Although high-yield savings accounts have high yields compared with standard savings accounts, they don’t typically pay enough interest to hit long-term savings goals. If you have a long-term goal — retirement, for example — and can handle some volatility, investments like stocks or mutual funds may be a better choice.

6 Things to Look for in a High-Yield Savings Account

Rates, fees, restrictions, and other factors can vary widely among high-yield accounts. It pays to do some comparison shopping using these six criteria.

1. Interest Rate

To find the savings account with the highest interest, you’ll want to compare APYs. This tells you how much interest you’ll earn from a savings account in one year. The calculation is based on the account's interest rate and the number of times interest is paid during the year.

An APY includes the effect of compounding interest, which is when both your principal and the accumulated interest earn interest. Compounding helps your cash grow faster than simple interest, which pays interest only on the principal. A savings account with the highest APY grows faster than an account with a lower yield.

2. Fees

Higher rates often come with a trade-off — fees. It’s wise to check carefully for monthly maintenance fees (although these are becoming far less common) that can eat into your additional earnings. 

You’ll also want to check for fees you might incur if you fall below a certain balance amount or if you make more than a certain number of withdrawals in a month. Some banks will charge a fee if you make more than 6-9 withdrawals or transfers out of your savings account in a month.

3. Minimum Initial Deposit

You’ll want to compare how much you need to deposit to qualify for the higher interest rate, as some banks require very little (or nothing) to open a high-yield account to gain your business, while others may require at least $100 to start an account. Accounts with higher initial deposits may, however, pay higher rates.

4. Minimum Balance Requirement

You’ll also want to take note of how much you need to keep in your account to earn the stated APY. Some high-yield accounts will tie rates to your balance, while others offer the same APY across all balances. Make sure you can comfortably meet any minimum thresholds so you’re able to get the interest rate you're expecting.

5. Access to Your Money

Can you link your savings account to your checking account for easy transfer of funds between accounts? Are there other ways to withdraw money from the account, such as using an ATM card? Can you make deposits via a mobile app? Think about how you’ll ideally want to access the money in your savings, as well as how often, to make sure the account will be easy and convenient for you to use.

6. Compounding Method

As mentioned above, compound interest allows your savings to grow quickly in a high-yield savings account. In an account that pays compound interest, the return is added to the original principal at the end of every compounding period. Banks can stipulate that interest will be compounded daily, monthly, quarterly, semiannually, or annually. The more your interest compounds, the greater your return.

If you stick to comparing accounts by APY (rather than by annual interest rate), however, the compounding factor will already have been taken into account. This allows you to make an apples-to-apples comparison of how much you can earn per year with the account.

Opening a High-Yield Savings Account

The process for opening a high-yield savings account will depend on the financial institution. Wherever you choose to open a high-yield account, however, the process should be relatively simple, and you may not even have to leave your home to both open and fund your new savings account. 

If you have access to a competitive high-yield savings account at your current bank, you may be able to open the new account through your online banking portal. This should be quick and easy, since the institution has all of your personal information.

If you're opening a savings account at an institution that is new to you, the process can be slightly more involved. Whether the account is at a traditional or an online-only bank, you can typically open the account from your computer or mobile device in about 15 minutes. You’ll need to fill out the electronic application, and in order to do so, you’ll likely need to have access to your driver's license, Social Security number, and primary bank account information.

The Takeaway

When you’re building your savings, you’ll want that money to earn a competitive yield. 

Putting your savings in a high-yield savings account allows you to keep your money safe while also earning a higher interest rate than you would get in a traditional savings account. These accounts can be ideal for meeting a short-term savings goal, such as building an emergency fund or being able to afford a major purchase within the next year or so.