A high-yield savings account can offer a secure place to keep money for the short or long term. Compared to traditional savings accounts, high-yield savings also can offer an interest rate that’s substantially higher than the national average.
Getting the best rate on savings may be important to you if you’re hoping to grow your money as much as possible. And the difference in yield may be significant the more your savings balance climbs, especially when interest rates for traditional savings accounts fall.
But if you’ve never had a higher interest savings account before, you may be wondering how they work and where to open one. Understanding the basics of high-yield savings can help you decide if opening one is worth it.
What Is a High-Yield Savings Account?
Generally speaking, a savings account is a type of deposit account offered by traditional banks, online banks and credit unions. You deposit money into a savings account and, in return, the bank pays you interest on your balance. This interest has to be reported on your taxes at the end of the year, if the interest earned is $10 or more.
A high-yield savings account works much the same as a regular savings account, with one key difference. The interest rate and accompanying annual percentage yield (APY) you earn may be anywhere from 10 to 25 times higher.
This is what it means for a savings account to be high-yield. In terms of how much of a difference high interest savings can make compared to regular savings accounts, here’s an example.
Say you want to open a savings account with $1,000 and save an additional $100 a month. Bank A offers a traditional savings account paying 0.05%. Bank B offers a high-yield savings account paying 0.50%.
Over a 12-month period, Bank A would pay you a whopping $0.77 in interest on your initial deposit and monthly contributions. Bank B, on the other hand, would pay you $7.75, or about 10 times the amount of interest.
Those are relatively small numbers, but they illustrate how stark the difference can be between traditional vs. high interest savings accounts. The higher the APY you can get with a high-yield savings account and the more you deposit, the more your money can grow.
How Do High-Yield Savings Accounts Work?
There are different types of savings accounts, including high-yield savings, but they all share some things in common.
For instance, high-yield savings accounts:
- Can be opened at banks and credit unions
- Allow you to make an initial deposit and monthly deposits
- Are accessible via withdrawals or transfers to linked bank accounts
High-yield accounts can be FDIC-protected if they’re held at an FDIC-insured bank. Just like other types of savings accounts, the same protection limits apply per depositor, per financial institution, for each account ownership category. So that means, even if the bank fails for any reason, your money in a high interest savings account is protected up to the applicable limits.
A high-yield savings account may also be subject to monthly withdrawal limits, the same as traditional savings accounts. 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 they can charge excess withdrawal fees.
What sets high-yield savings accounts apart, aside from the interest rate and APY they can earn, includes:
- Where you can open them
- Minimum deposit requirements
- Monthly fees
In terms of where to find a high-yield savings account, traditional banks and credit unions can offer them. But you’re more likely to see them at online banks and neobanks (fintechs offering online-based financial services).
Online banks typically have lower operating costs compared to brick-and-mortar financial institutions. As a result, they can offer higher interest rates to savers. At the same time, they may also charge fewer fees for high-yield savings.
For instance, you may pay no monthly maintenance fees or minimum balance fees. There may be no excess withdrawal fees or wire transfer fees either. Those features can add to a high-yield savings account’s appeal, since not only do you get a higher rate but also you’re saving money on fees.
Minimum deposit requirements can vary from bank to bank. It’s possible to open high-yield savings accounts with as little as $0 at certain online banks, though some may require you to have $100 or more to get started.
Benefits of High-Yield Savings Accounts
If you’re wondering whether opening a high-yield savings account makes sense, it helps to consider the benefits.
Again, a high-yield savings account can offer a secure place to keep your savings until you plan to spend. You could use a high-yield savings account to save for a variety of short- and long-term financial needs and goals, including:
- Emergency savings
- Vacation funds
- Planning a wedding
- Paying for medical expenses
- Buying a car
- Starting a business
- Buying a home
- College planning
A high-yield savings account isn’t necessarily a good fit for something like retirement savings. For that, you will likely be better off looking into tax-advantaged retirement accounts or a taxable investment account, either of which can offer more room for growth. But, overall, high-yield savings accounts can serve more than one purpose as part of your financial plan.
The interest you could earn may far outpace the APY you could get with a traditional savings account or even a money market account or certificate of deposit. And, compared to a CD, high-yield savings accounts can offer more flexibility when it comes to withdrawing money. For instance, you could link a high interest savings account to your checking account for convenient transfers.
Being able to avoid monthly maintenance fees or other fees is an added benefit. Consider the previous example. With the traditional savings account, your yearly interest earnings would break down to about six and a half cents per month. If the bank’s charging you $5 or $10 a month as a maintenance fee, that savings account is actually costing you money. A high-yield account, on the other hand, may have no fees to worry about at all.
How to Open a High-Yield Savings Account
If you’re interested in a high-yield savings account, opening one is relatively easy. You’ll just need to choose an account that best fits your needs and then complete the account opening process with the bank.
In terms of choosing a high-yield savings account, there are a few things to pay attention to. Specifically, consider the following as you compare high interest savings options:
- Interest rate and APY. Of course, the first thing you’ll want to look at is the interest rate and APY. This can help you compare which high-yield savings accounts are the best at a glance, based purely on interest-earning potential.
- Minimum deposit requirements. Next, consider how much money you’ll need to deposit to open a high-yield savings account. Also, take note of any different minimum balance requirements you may need to meet to earn the stated return.
- Fees. As mentioned, fees can eat away at the interest you earn on your savings. Check to see if a high-yield savings account charges monthly maintenance fees, minimum balance fees or any other type of fees.
- Access. If you’re opening a high interest savings account online, then branch banking or ATM access may not be an option. Consider what methods you have for adding money to or withdrawing money from your account.
- Online and mobile banking. Again, if you’re opening a savings account online, it’s important to be able to manage it wherever you are. Looking at the bank’s website and its mobile banking app, including reviews on the App Store and Google Play, can give you an idea of what type of digital banking experience to expect.
- Customer service. If you have questions about or issues with your high-yield savings account, it’s important to be able to get help when you need it. So consider what type of customer support options (by phone, messaging or live chat) is available.
Once you’ve chosen a bank, the next step is opening an account. This is similar to opening any other type of savings account, in that you’ll need to provide some basic personal information like your name, address and Social Security number. You’ll also need to share routing and account number information for the bank account you plan to make your initial deposit from. But, other than that, opening a high interest savings account online can be a relatively quick and easy process.
Do the Math on High-Yield Savings
While online banking is increasing in popularity, many people still prefer the brick-and-mortar approach. A simple way to decide if a high interest savings account could work for you is to use a savings calculator to estimate the interest you could earn in a year. Seeing the difference in returns between a high-yield savings versus traditional savings account could persuade you to give online banking a try.
