4 Factors to Consider When You’re Choosing a High-Yield Savings Account

A hand pretends to plant rows of seedlings, which are really rolled-up dollar bills, in a garden.
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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!

And depending on your savings 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 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 Feb. 4, 2019, savings accounts earned an average interest rate of just 0.09%. But high-yield savings accounts can earn you over 2% interest — more than 20 times what that traditional savings account might earn.

Two percent interest may not sound like a lot, but let’s take a look at a real-life example.

If you had $1,000 in a savings account that earned 0.09% interest, you’d have $1,004.51 at the end of five years, assuming the interest was compounded once annually.

If you had the same amount of money in an account earning 2% interest compounded once annually, you’d have $1,104.08 at the end of those five years. That’s $100 more to pad your savings.

How to Choose a High-Yield Savings 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 your online bank offers.

If you choose an online bank, find out if it 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?

In December, fintech startup Robinhood announced it would offer savings and checking accounts with an industry-leading 3% interest rate. But the company had to backtrack the next day, once it was discovered that the accounts weren’t properly 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 regular 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.