What is a high-yield savings account
Whether you're building an emergency fund or simply planning for retirement, how you save is almost as essential as why you save. Opening a high-yield savings account is one of the simplest and most secure ways to increase your money's earning potential. But what is a high-yield savings account, and how does it operate? Continue reading to learn more.
What is a high-yield savings account?
A high-yield savings account is simply defined as follows: It is a savings instrument that allows you to earn higher-than-average interest on your deposits. A high-yield savings account, as the name implies, is one that pays a high rate of interest. This sort of savings account provides more bang for your buck because the interest generated is higher than the national average for a conventional savings account.
High-yield savings accounts are available at a variety of financial organizations, including traditional banks, online banks, and credit unions. However, internet banks often provide the best rates because they have lesser overhead than other financial institutions, allowing them to offer higher APY on their accounts. Keep this in mind as you look to open an account.
How Do High-Yield Savings Accounts Work?
A high-yield savings account should function similarly to a standard savings account. However, here are some details regarding how savings accounts work, including how you earn interest and how frequently you can withdraw your funds.
Interest
The amount of interest you receive with a high-yield savings account depends on three key factors:
Your account's balance
The account's interest rate
How often is interest compounded?
Banks can compound interest as often as every day or as infrequently as once a year. However, the income in high-yield accounts is often compounded more frequently than in ordinary savings accounts.
Account requirements
Some high-yield accounts have a balance or other account conditions that must be met in order to receive the high APY and avoid a monthly account maintenance fee. Other banks may only apply the higher APY to a certain maximum sum, such as the first $5,000, and then apply a reduced APY to any leftover balance.
Fees
A high-yield account may have expenses, ranging from monthly maintenance fees to excessive withdrawal fees. However, many banks now offer fee-free accounts or allow you to avoid costs provided you meet certain account conditions.
Account Access
A high-yield account may have an ATM card for account access. If you choose a financial institution that does not offer one, you can transfer funds to a checking or other deposit account, or withdraw monies from a physical branch if the account is not with an online bank.
Withdraw Limits
Savings accounts are intended to encourage saving, so you can often make as many monthly contributions or transfers as you need. However, some banking institutions limit the quantity of certain types of monthly withdrawals you can make. These banks may charge fees for excessive withdrawals, transfer your funds to a checking account, or terminate your account if you consistently exceed your monthly limit.
ATM and in-branch transfers or withdrawals are normally not counted against your monthly withdrawal limit. However, all other transfers and debit card transactions may be counted.
Advantages and disadvantages of high-yield savings accounts.
Before placing your money in a high-yield savings account, consider the benefits and drawbacks to see if it's the best location for it. If you're saving for a specific financial goal, a high-yield savings account may be appropriate, or another investment option may help you accomplish your goal more quickly.
Pros
High-yield savings accounts are good for emergency funds and short-term savings. Here's why.
High interest rates: Because of the high-interest rate, your money will grow considerably faster in a high-yield savings account than in a conventional savings account, allowing you to attain your goal sooner.
Accessibility: Unlike other assets such as stocks or CDs, high-yield savings accounts allow you to access your money more easily. This quick access is useful when an unforeseen expense arises or when you've met your objective and require your money right away.
No or low fees: It is simple to find high-yield savings accounts with little or no monthly maintenance fees, as well as simple account conditions to avoid fees.
No risk: Funds in high-yield savings accounts are often guaranteed by the Federal Deposit Insurance Corporation, or the National Credit Union Administration for credit union accounts, providing a secure way to keep your money. Furthermore, while savings account rates may fall, you cannot lose your money.
Protection from inflation: The returns from some high-yield savings accounts may protect your money's purchasing power against inflation. However, this is not true for all high-yield savings rates.
Cons
Consider these disadvantages before deciding whether a high-yield savings account is the appropriate vehicle for your money:
Variable interest rate: Unlike CDs, which have fixed rates, high-yield savings accounts' interest rates are variable and can fluctuate at any time, potentially resulting in reduced returns.
Transaction limits: Some financial institutions may limit the number of specific sorts of transactions you can conduct each month and levy penalties if you exceed the limit.
Minimum balance requirements: Some high-yield savings accounts may demand a large balance to start or achieve a higher APY.
Opportunity cost: While high-yield savings accounts provide greater interest rates than conventional savings accounts, other investment options, such as stocks or bonds, may provide larger returns, albeit at a higher risk.
Potential fees: While many high-yield savings accounts have little or no fees, it's critical to check the fine print before creating a new account to identify any expenses that could reduce your earnings.
Choosing a high-yield savings account
The most important thing to consider before creating a high-yield savings account is whether it matches your specific financial demands. You will also hunt for an account with a high-interest rate. Otherwise, it negates the purpose of seeking a high-yield savings account to begin with. Aside from that, you should ask the following questions regarding any account you're considering.
Is the account Federally insured?
The safest method to secure your money is to open a high-yield savings account with an FDIC or NCUA-insured bank or credit union.
How are the fees structured? A terrific interest rate isn't worth much if it's offset by exorbitant costs, so do your research and opt for a savings account with free or low monthly maintenance and other expenses.
How are customer reviews? Take the time to learn about other customers' experiences with the financial institution's customer service, technology, products, and features.
Does the account have a minimum balance requirement?
If the account has minimum balance requirements, your balance must reach them during each statement cycle, or you will be charged a fee. Online banks typically do not have minimum balance requirements.
What is the first deposit requirement? Although many banks have fair starting deposit requirements, the lower the amount, the better.
What is the monthly transaction limit? If you don't want to worry about transaction restrictions and fees, find out how many deposits or withdrawals you can make per month.
High-Yield Savings Accounts with Best Rates
Because the primary goal of a high-yield savings account is to receive the best return on your money, you should compare rates at other banks to guarantee you select one that is competitive with the rest of the sector. So, which savings account will pay you the most money? Here is a list of banks that have continuously offered some of the highest interest rates. Keep in mind that rates are subject to change and may require completing specific restrictions.
| Account |
Annual Percentage Yield |
| UFB High Yield Savings |
5.25% |
| Ally Bank Savings Account |
4.20% |
| Marcus Online Savings Account |
4.40% |
| TAB Bank High Yield Savings Account |
5.27% |
| Capital One 360 Performance Savings |
4.25% |
| PNC High Yield Savings |
4.65% |
How much would $10,000 earn in a high-yield savings account?
If you deposit $10,000 in a high-yield account at one of the financial institutions listed in the preceding table, you would earn approximately $500 in a year. High-yield savings rates are significantly greater than the current national average savings account return of 0.46%. Assuming your variable rate remains constant for one year, interest is compounded monthly, and you pay no account fees and make no further deposits or withdrawals, your $10,000 may earn the following in one year compared to the national average savings account rate:
| APY |
Interest Earned |
One-Year Balance |
| 0.46% |
$46.10 |
$10,046.10 |
| 4.25% |
$433.38 |
$10,433.38 |
| 5.27% |
$539.92 |
$10,539.92 |
Given the abundance of high-yield savings accounts with no fees or minimum balance requirements, leaving money in a standard savings account might cost you significant interest, even if you don't have $10,000 saved.
Are high-yield savings accounts worthwhile?
If you are comfortable with digital-only banking and need an extra incentive to save more, high-yield savings accounts may be right for you. The all-mobile Varo Bank Savings Account has a tiered APY program that offers higher rates if you meet specific requirements.
Marcus by Goldman Sachs, Member FDIC, offers free and flexible accounts with no monthly service fees or minimum deposit requirements. After you've prioritized what you want from a high-yield savings account, consider other aspects.
FAQ
How does a high-yield savings account work?
A high-yield savings account operates by offering a greater interest rate than a traditional savings account. This allows your money to grow more fast as the APY increases.
Are high-yielding savings accounts a smart idea?
Yes, a high-yield savings account is an excellent idea provided it matches your financial needs and offers high interest rates. However, some accounts may have minimum balance requirements or fees.
What are the disadvantages of a high-yield savings account?
Some disadvantages of depositing your money in a high-yield savings account include the following:
Limited transfers and withdrawals.
There may be better and higher-return investments.
There are usually fees or minimum balance requirements.
How much interest can a savings account earn?
According to the FDIC, the most recent national average savings account rate is 0.46%. Many high-yield savings accounts have an APY significantly higher than the national average. Several high-yield savings accounts are available, with APYs of at least 4.00% and some exceeding 5.00%.
Why do certain accounts, such as savings accounts at your local bank, receive interest?
Banks provide interest-bearing accounts to encourage customers to deposit money with them. Banks require deposits to support loans and investments, which enable them to produce revenue.
Can you withdraw funds from a high-yield savings account?
Yes, you can withdraw funds from a high-yield savings account; however, certain banks may limit the number and type of penalty-free withdrawals available.
