What Is a High-Yield Savings Account and How Do You Pick One? We Explain
So you’ve made a budget, cut out unnecessary spending and found ways to earn extra income. You finally have money to set aside. Great work!
Now the question is: Where will you stash that cash?
If you just let it pile up in your checking account — or worse, stuff it under your mattress — your money won’t be working to its highest potential. You want your savings to grow!
Depending on your goals, there are different ways you should save. You’ll put your money in a 401(k) or an IRA if you’re saving for retirement. If you’re looking to contribute to your kid’s future college tuition bill, you might want to stash your money in a 529 savings plan.
But if you’re saving money for a rainy day or trying to bulk up that emergency fund, a high-yield savings account is the perfect place to store your coins.
What Is a High-Yield Savings Account?
As of January 2023, the national average interest rate for saving accounts is 0.30% — pretty solid after years of interest rates in the single digits. But high-yield savings accounts typically boast even higher rates than what a traditional savings account might earn.
Let’s take a look at a real-life example.
If you put $10,000 in a savings account that earned 0.30% interest, you’d earn $30 in interest by the end of the year. If you had the same amount of money in a high-yield savings account earning 3% interest, you’d earn a cool $300 in interest by the end of the year. That’s $270 more to pad your savings.
For the past couple years, interest rates were historically low. That means it cost less to borrow money, but the interest rates attached to savings accounts and CDs were also depressed.
These days, a high-yield savings account can pay interest of 2% or even up to 5%.
How You Should Use a High-Yield Savings Account
Typically, you’ll house money in a high-interest savings account for the same reasons you’d use a traditional savings account. High-interest savings accounts are stable savings vehicles for money you’ll want to access in the next one to five years.
Open a high-yield savings account for goals like:
- An emergency fund
- A downpayment on a new car
- A downpayment on a house
- A big vacation
- Future wedding expenses
- Startup costs for an entrepreneurial endeavor
Similar savings vehicles you might consider are a money market account or a certificate of deposit, if you don’t plan on accessing that money in at least a year.
Benefits of High-Yield Savings Accounts
High-yield savings accounts are often a better choice than traditional savings accounts because you earn more interest on your money.
Your money won’t grow as fast as it could if you invested it, but there’s no risk of losing your savings if your account is with a FDIC-insured bank or NCUA-insured credit union.
Also, if you open your high-yield savings account at an online bank or a bank separate from your main checking account, it could take up to a day or two to transfer money out of your account for spending. Having that extra waiting period can help you avoid dipping into your savings on a whim when you see a sale at your favorite store.
Disadvantages of High-Yield Savings Accounts
Some high-yield savings accounts have minimum deposit requirements or minimum balance requirements, meaning you’ll need a certain amount of money to open your account and you can’t let your balance drop below a certain amount without encountering fees. Your account may also charge monthly fees for maintenance.
Just like regular savings accounts, the financial institution may have restrictions on how often you can withdraw or transfer money out of your high-interest saving account.
If you’re transferring money from your high-yield savings account to your checking account, you might have to wait a couple days for the transfer to clear — which can be inconvenient if you need to access your money immediately.
How to Choose the Best High-Yield Savings Account
With many options available for high-yield savings accounts, it can be tough to decide where to open a new account.
Making sure you get the highest return on your savings is a smart money move, but you’ll want to consider other factors when opening a high-yield savings account. Here are four things to think about.
1. Online vs. Traditional Bank
One of the first things to decide is whether you want to save your money at a traditional bank or one that’s online only. In the past, online banks offered better interest rates, but traditional banks have stepped up to compete.
You may prefer being able to go into a brick-and-mortar location to speak with a banker in person. Or perhaps you prefer the 24/7 convenience that online banks offer.
If you choose an online savings account, find out if the online bank belongs to an ATM network that lets you use another bank’s ATM to deposit or withdraw funds for free. If it doesn’t, you need to figure out how you’ll be able to deposit or withdraw your money. If you plan to make electronic transfers from your checking account, make sure the two accounts will link.
2. Are Your Savings Insured?
No matter where you open your account, make sure the money you keep in that account is insured.
If you open your account at an FDIC-insured bank, the federal government will insure your money up to $250,000. If your account is with an NCUA-insured credit union, the National Credit Union Share Insurance Fund will insure your money — also up to $250,000.
3. Minimum Balance and Account Fees
Before opening your account, you should know if your account requires a minimum balance. Some accounts only apply the interest as long as you hold a certain balance, and others may charge a fee if you drop below that minimum amount. You’ll also want to check if the account issues monthly maintenance fees.
And while the purpose of putting your money in a high-yield savings account is to, well, save, there is going to come a day when you’ll need to tap into those funds. Find out if your account has rules outlining how often you can make withdrawals or transfer money out of the account.
4. How Much Interest You’ll Earn
When comparing interest rates, you may notice two different percentages — the APY (annual percentage yield) and the APR (annual percentage rate).
The APY is the number you really want to know when you’re opening a savings account. It factors in how often the interest is compounded in a year — whether that’s daily, monthly, semiannually or annually — and therefore, shows the total amount of interest you’ll earn in a year. The more frequently the interest is compounded, the more you’ll earn in returns.
Nicole Dow is a senior writer at The Penny Hoarder. Freelancer Kathleen Garvin contributed to this report.