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A high-yield savings account can provide a safe place to hold money for the short or long term. Compared to traditional savings accounts, high-yield savings can also offer an interest rate significantly higher than the national average.
Getting the best savings rate can be important to you if you hope to grow your money as much as possible. And the difference in returns can be significant as your savings balance climbs, especially when interest rates on traditional savings accounts drop.
But if you’ve never had a higher interest savings account before, you might 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.
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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 must 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 difference. The interest rate and annual percentage yield (APY) you earn can be 10 to 25 times higher.
This is what it means for a savings account to be high yielding. As for the difference a high-interest savings can make compared to a regular savings account, here’s an example.
Suppose you want to open a savings account with $1,000 and save an additional $100 per month. Bank A offers a traditional savings account at 0.05%. Bank B offers a high yield savings account at 0.50%.
Over a 12 month period, Bank A would pay you $0.77 in interest on your initial deposit and monthly contributions. Bank B, on the other hand, would pay you $7.75, which is about 10 times the interest amount.
These are relatively small numbers, but they illustrate how stark the difference can be between traditional savings accounts and high-interest savings accounts. The more 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 accounts, but they all share some commonalities.
For example, 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 may be FDIC protected if held at an FDIC-insured bank. As with other types of savings accounts, the same protection limits apply per depositor, per financial institution, for each category of account holder. So this means that even if the bank fails for whatever 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, like traditional savings accounts. While federal rules limiting savings account owners to six withdrawals per month have been suspended, banks and credit unions can still limit the number of withdrawals you are allowed to make. And they may charge excess withdrawal fees.
What sets high-yield savings accounts apart, besides the interest rate and APY they can earn, include:
- where you can open them
- Minimum deposit requirements
- Monthly fee
To find out where to find a high-yield savings account, traditional banks and credit unions can offer them. But you are more likely to see them in online banks and neobanks (fintechs offering online financial services).
Online banks generally have lower operating costs than physical financial institutions. As a result, they can offer higher interest rates to savers. At the same time, they can also charge lower fees for high-yield savings.
For example, you may not pay monthly maintenance fees or minimum balance fees. There may also be no excess withdrawal fees or wire transfer fees. These features can add to the appeal of a high yield savings account because not only do you get a higher rate, but you also save money on fees.
Minimum deposit requirements may vary from bank to bank. It’s possible to open high-yield savings accounts with as little as $0 at some online banks, although some may require you to have $100 or more to get started.
Benefits of High Yield Savings Accounts
If you’re wondering if opening a high-yield savings account makes sense, it’s worth considering the benefits.
Again, a high-yield savings account can provide a safe place to hold your savings until you plan to spend. You can use a High Yield Savings Account to save for a variety of short- and long-term financial needs and goals, including:
- emergency savings
- Vacation fund
- Plan a wedding
- Coverage of medical expenses
- To buy a car
- start a business
- To buy a house
- college planning
A high yield savings account is not necessarily a good choice for something like retirement savings. For that, you’re probably better off turning to 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 multiple purposes as part of your financial plan.
The interest you could earn can far exceed 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 example, you can link a high-interest savings account to your checking account for convenient transfers.
Being able to avoid monthly maintenance fees or other charges is an added benefit. Consider the previous example. With the traditional savings account, your annual interest income would break down to about six and a half cents per month. If the bank charges you $5 or $10 a month as a management fee, that savings account is actually costing you money. A high yield account, on the other hand, may not have any fees to worry about at all.
How to Open a High Yield Savings Account
If you’re interested in a high-yield savings account, it’s relatively easy to open one. You will only have to choose an account that best suits your needs and then complete the process of opening an account with the bank.
When it comes to choosing a high yield savings account, there are a few things to pay attention to. Specifically, consider the following when comparing high-interest savings options:
- Interest rate and APY. Of course, the first thing you’ll want to look at is the interest rate and the APY. This can help you compare the best high-yield savings accounts at a glance, based on interest earning potential alone.
- Minimum deposit requirements. Next, consider how much money you will need to deposit to open a high yield savings account. Also take note of the different minimum balance requirements that you may need to meet to get the listed return.
- Costs. As mentioned, fees can eat into 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 fee.
- To access. If you open a high-interest savings account online, access to branch banking or an ATM may not be an option. Think about the methods you have to add money to or withdraw money from your account.
- Online and mobile banking. Again, if you open a savings account online, it’s important to be able to manage it wherever you are. By checking out the bank’s website and its mobile banking app, including reviews on the App Store and Google Play, you can get an idea of the kind of digital banking experience you can expect.
- Customer service. If you have questions or issues with your High Yield Savings Account, it’s important that you can get help when you need it. So consider what kind of customer support options (via phone, email, or live chat) are available.
Once you have chosen a bank, the next step is to open an account. This is similar to opening any other type of savings account, in that you will need to provide basic personal information such as your name, address, and social security number. You will also need to share routing and account number information for the bank account from which you plan to make your initial deposit. 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 growing in popularity, many people still prefer the brick and mortar approach. A simple way to decide if a high-interest savings account might be right for you is to use a savings calculator to estimate how much interest you might earn in a year. Seeing the difference in returns between a high-yield savings account and a traditional savings account might persuade you to try online banking.