Guide to High-Yield Savings Accounts

Walecia KonradUpdated October 27, 2022

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With interest rates on the rise, 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.What exactly is that? 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 make well over 2% APY (annual percentage yield), versus the national savings average of 0.16%.Whether you’re saving for a vacation or a new set of wheels, you may be able to reach your goal faster with a high-yield savings account. 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.

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, or annual percentage yield. The higher the APY on a particular savings account, the faster your money grows.Whether you choose a traditional or 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 for a short-term goal, such as building an emergency fund, buying furniture, buying a new (or used) 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, work bonus, or inheritance, until you determine where best to invest those funds. Even high-interest savings account rates, however, 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	Cons
Higher interest rates	APY isn’t guaranteed
Low risk	May have minimum balance requirements
Low cost	Transferring funds to a checking account at a different bank can take a day or two.
Can be a good choice for short-term savings goals	May not be a good choice for long-term savings goals

Pros

Higher interest rates APYs offered by high-yield savings accounts can be 20 to 25 times higher than the APYs offered by traditional savings accounts. This allows your money to grow faster.
Low risk The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) insure 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 offered by 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 like 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 may require a relatively large deposit to open an account. They may also require you keep a minimum balance or risk incurring fees or losing the higher rate.
Time lag on withdrawals If your high-yield savings account is not 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 pay enough interest to hit long-term savings goals. If you have a long-term goal like retirement 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 stands for “annual percentage yield,” and tells you how much interest a bank account earns 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. So 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 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 six to nine withdrawals or transfers out of your savings account in a month).

3. Minimum Initial Deposit

How much will you need to deposit to qualify for the higher interest rate? This is something you’ll want to compare, 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. You'll want to 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 high-yield 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 will 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 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. Recommended: Money Market vs High-Yield Savings 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 online-only bank, you can typically open the account from your computer or mobile device in about 15 minutes or so. You’ll need to fill out the electronic application, and in order to do so, you will 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.

3 Money Tips

1. Checking accounts are ideal for everyday transactions but earn little or no interest. Savings accounts are better for storing and growing your money — they earn higher interest but often restrict how many withdrawals you can make per month.2. An emergency fund is a key financial safety net. Aim to have three- to six-months worth of living expenses tucked away in a separate account that earns interest, but allows you to access the money if needed (such as a high-yield savings account). There are times that professionals recommend up to 12 months of emergency savings.3. To get into the savings habit, consider having 10% of your paycheck directly deposited into your savings account. Or, set up a small automatic recurring transfer from your checking account into your savings account on the same day each month.

Frequently Asked Questions

How much will $10,000 make in a high-yield savings account?

Are there any downsides to high-yield savings accounts?

Are high-yield savings accounts worthwhile?

Photo credit: iStock/courtneyk

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About the Author

Walecia Konrad

Walecia Konrad is an award-winning financial journalist with 25 years of experience in print and digital media. She is a graduate of Syracuse University and specializes in the topics of health care, personal finance, and employer-sponsored benefits. Konrad's work has been seen on CBS MoneyWatch, The New York Times, Money, SmartMoney, BusinessWeek, and Forbes. She has been the recipient of both a Pearl Award for Best Web Publication of the Year and a National Magazine Award for Personal Service.

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