What is a high-yield savings account?

A high-yield savings account is a type of deposit account known for offering higher interest rates than traditional savings accounts. These savings accounts can be an excellent choice if you want to grow your savings faster.

High-yield savings accounts are notable for their superior interest rates, making them a popular way to grow your savings, particularly for emergency funds or short- to mid-term financial goals. They offer a blend of security and accessibility, similar to traditional savings accounts, but with the added advantage of higher returns. They do, however, often come with higher requirements for opening deposits and minimum balances, as well as potential fees. 

Here’s what we’ll cover:

• How high-yield savings accounts work
• High-yield savings accounts vs. other deposit accounts
• Pros of a high-yield savings account
• Cons of a high-yield savings account
• Use cases for a high-yield savings account

How high-yield savings accounts work

High-yield savings accounts are typically offered by FDIC-insured institutions like banks or credit unions. The main appeal lies in their higher annual percentage yields (APYs) compared to traditional savings accounts, which can enhance the growth of your savings. If you’re building an emergency fund or saving up for near-term goals, you can earn more interest with a high-yield savings account, reaching your target savings goal faster. 

Annual percentage yield (APY)

The interest rate is the percentage of interest a bank pays on the savings balance in your account. The annual percentage yield (APY), in contrast, takes compounding interest into account to reflect the total amount of interest that will be earned on an account over a year. Compounding interest is the process of earning interest on both the money you deposit plus the interest you’ve already earned. While the interest rate on a high-yield savings account is simply the percentage of your account balance the bank will give you, the APY reflects how much total interest you’d earn if you kept your money in the account for 12 months. 

High-yield savings accounts generally offer better far interest rates and APYs than regular savings accounts. For instance, while the average traditional savings account rate is around 0.46% as of April 2024, the top high-yield savings accounts range between 4.5 and 5.3% APY. Rates for savings accounts are variable; banks often change them when the Federal Reserve modifies interest rates in response to economic conditions.

Compounding schedule

The compounding schedule is the frequency at which interest is added to the principal; at that point, you start earning interest on that interest. This way, your money grows at increasingly higher rates over time. Different banks offer varying compounding schedules, such as daily or monthly, affecting how quickly your savings grow. For example, $1,000 in a high-yield savings account with daily compounding at a 4.3% APY would potentially earn about 12 cents per day, or $43 annually, without any additional contributions. 

Required initial deposit

Some high-yield savings accounts may require a specific initial deposit to open the account, often higher than what’s required for a traditional savings account. The initial deposit requirement can vary widely among different financial institutions. This can make high-yield savings accounts less accessible for people who are just getting started on their savings plans and don’t have a lot of money to put into an account at the outset. 

Minimum required balances

Maintaining a minimum balance is often a requirement in high-yield savings accounts, and the amount is usually higher than that for a traditional savings account. If your withdrawals cause your balance to fall below this minimum, the bank might charge fees or reduce your account’s interest rate.

Fees

While a high-yield savings account can generate more interest earnings, it may come with fees. These can include monthly maintenance fees, transaction fees, or penalties for not maintaining a minimum balance. Consider how these additional expenses might impact the total return on your savings when deciding where to store your money. If the fees exceed how much you earn in interest, a high-yield savings account might not actually help you grow your savings. 

Withdrawals

High-yield savings accounts may limit the frequency of withdrawals. Depending on the account’s policies, you could be limited to a certain number of withdrawals per month, with fees incurred for additional transactions. Make sure to understand these limits before you open an account, especially if you expect to withdraw funds frequently.

Other requirements

To earn the maximum APY, some high-yield savings accounts may have additional requirements. These could include setting up direct deposit, maintaining a certain account balance, or linking to other accounts at the same institution. Your credit score can also be a factor; some banks won’t offer you the highest possible interest rate unless you have very good or excellent credit. 

FDIC insurance

The federal deposit insurance corporation (FDIC) is tasked with protecting the nation’s banking system. FDIC insurance ensures the safety of the funds that depositors keep in an account with a bank or credit union in the event the institution gets into financial trouble or goes under. This insurance protects your savings up to $250,000, offering peace of mind that your funds are secure. Unlike investment vehicles like stocks and bonds, high-yield savings accounts are deposit accounts at financial institutions, where your money is protected by the federal government’s insurance program.

High-yield savings accounts vs. other deposit accounts

There are various types of deposit accounts where you can store your savings, and each differs from high-yield savings accounts in various ways. 

Checking accounts

Checking accounts and savings accounts function differently. Your checking account is designed for paying bills and day-to-day spending, so it will likely come with a debit card, checks, and no limit on transactions. Checking accounts often offer no interest or much lower interest rates compared to savings accounts, so they’re not generally used for growing your money over time. 

Traditional savings accounts

The primary way in which a traditional savings account differs from a high-yield account is in the interest rate. You’ll usually earn a much lower rate with a traditional account, so your savings won’t grow as quickly. The minimum required deposit and balance is also usually lower for a traditional account; some savings accounts have no minimum requirements at all. If a bank limits the number of monthly withdrawals for savings accounts, it’s usually the same for both traditional and high-yield accounts. 

Money market accounts

Money market accounts combine features of both savings and checking accounts, often with higher interest rates than traditional savings accounts but with greater access to funds. However, they may still not match the interest rates of high-yield savings accounts. The primary appeal of money market accounts is how easy it is to access your money: unlike savings accounts, they usually come with check-writing privileges and even a debit card, so you can spend directly from them. That said, there’s usually a limit on the number of transactions per month. 

Certificates of deposit (CDs)

Certificates of deposit (CDs) are time-bound deposit accounts with fixed interest rates and maturity dates. Unlike high-yield savings accounts, CDs require that you deposit a certain amount of money upfront and keep it in the account for a set time period. You can’t usually make additional deposits, and if you withdraw your money before the full term is up, you’re likely to lose some interest earrings. CDs usually offer similar interest rates to high-yield savings accounts, but rates are fixed, so they can’t drop during the CD’s term. 

Advantages of a high-yield savings account 

High-yield savings accounts offer several benefits:

• Higher interest rates: These accounts provide higher interest rates compared to traditional savings and checking accounts, allowing your money to grow faster.
• Low risk: With FDIC insurance, high-yield savings accounts come with the assurance that you’re very unlikely to lose your money. So there’s much lower risk compared to investment options like brokerage accounts.
• Easy to open: Many high-yield savings accounts, particularly online savings accounts, can be opened quickly and easily from your mobile phone or computer.
• Highly liquid: Unlike CDs and investment vehicles, high-yield savings accounts offer more liquidity, meaning you can easily withdraw your money any time.

Downsides of a high-yield savings account 

High-yield savings accounts also come with some drawbacks. Consider the following:

• Minimum balance: Some high-yield savings accounts require a higher minimum balance than traditional savings accounts, which could be a hurdle for some savers.
• Fees: Potential fees associated with high-yield savings accounts could offset the benefits of higher interest rates, especially compared to traditional savings and checking accounts.
• Withdrawal limits: Compared to checking accounts, high-yield savings accounts may have more restrictions on how often you can withdraw money, which could be inconvenient if you need frequent access to your funds.

Uses for a high-yield savings account

High-yield savings accounts provide a balance of security, growth, and liquidity, making them useful for things like storing your emergency fund and setting aside money for short- and mid-term goals. 

• Low-risk saving: High-yield savings accounts offer competitive interest rates but without the risks associated with volatile investments like stocks. If you’re looking for low risk ways to grow your money, a high-yield savings account can offer growth along with security.  
• Short-term growth: These accounts are also ideal for things you want to achieve within a few years, such as saving for a vacation or a new car. While investing in stocks is usually advised for long-term goals, a high-yield savings account can be a useful option for growing your money for short-term goals. 
• High-yield saving: If you want to maximize your money’s growth, there are many high-yield options. All come with various levels of risk; a high-yield savings account gives you better returns than standard savings accounts, but with less risk than investing.

Keep in mind that when it comes to your money’s long-term growth potential, investing is often more effective than a savings account for financial goals that are far in the future, like retirement or funding your kids’ college education. Investment returns have typically outpaced inflation over time, a feat that interest rates on savings accounts may not achieve. 

Maximize your savings strategy with a high-yield savings account

While you could certainly stash cash under your mattress or keep extra money in your checking account, your savings strategy will be more effective if you put your money to work earning interest. A high-yield savings account can help your savings grow over time, while keeping it safe and accessible for when you need it. 

If you’re looking to optimize your savings growth with the peace of mind provided by FDIC insurance, a high-yield savings account could be a valuable tool in your personal finance arsenal.

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