High-yield savings accounts are similar to standard savings accounts, but they pay higher interest rates. They are great for maintaining an emergency fund or reaching short-term savings goals. If you’re considering a high-yield savings account, it’s essential to understand how they work and what to look for so you can save money with achievable goals in mind.
What is a high-yield savings account?
A high-yield savings account is a deposit account that offers a higher interest rate than a traditional savings account, allowing you to earn more on your savings. Some banks may charge monthly maintenance fees or limit the number of withdrawals you can make, but online banks typically offer high-yield accounts with no fees.
A high-yield savings account’s interest rate will be noted as APY, or annual percentage yield. A higher APY means you’ll earn more interest on your savings. The rate on a high-yield savings account is variable, meaning the APY can fluctuate. However, with a high-yield savings account, you’ll still earn the highest interest rate on your money. Most of today’s best high-yield savings accounts have APYs of at least 2.15%, which is 10 times higher than the national savings account average of 0.21%.
How do high-yield savings accounts work?
When you put your money in a savings account, you want to earn a competitive yield to maximize growth. The higher the APY, the more you’ll earn and be able to take advantage of compound interest. Compound interest means you’ll earn interest on your principal balance and the interest it earns -- in other words, interest on interest. Your interest will compound daily or monthly depending on the terms of your account. The higher the interest rate, and the more frequently your interest compounds, the more you’ll earn over time.
With a high-yield savings account, you’ll be able to access your money at any time. However, your bank may limit you to six withdrawals from the account per month and may charge a fee for exceeding that limit.
To open a high-yield savings account, you’ll need some basic information such as a Social Security number, one form of ID such as a driver’s license and some contact information.
The best online banks tend to offer the most competitive yields. Many online banks don’t charge a monthly service fee, and some don’t have a minimum balance or opening deposit requirements either.
Pros of a high-yield savings account
- Higher APYs: The interest rate for a high-yield savings account is typically higher than that of a traditional savings account.
- Security: Money held in an FDIC-insured bank is protected up to $250,000 per depositor, per account ownership type, per financial institution. FDIC insurance protects your money in case the bank goes bankrupt.
- No monthly fees: Many high-yield savings accounts don’t charge monthly fees, though some do. Be sure to check the terms and fees of your high-yield savings account before opening to avoid any confusion. Keep in mind, some accounts waive the monthly fee if you meet a minimum balance.
- Accessibility: You can access your funds in a high-yield savings account. Your bank may limit you to six withdrawals per month and charge a fee for any withdrawals above that limit.
- Compound interest: Many high-yield savings accounts compound interest daily.
Cons of a high-yield savings account
- Variable interest rate: The interest rate on a high-yield savings account is variable, which means it can change at any time.
- Higher minimum deposit requirements: Some high-yield savings accounts have higher minimum deposit requirements than your everyday savings account.
What should you look for in a high-yield savings account?
When choosing a high-yield savings account, consider the following terms:
You’ll want the highest APY possible with a high-yield savings account. As rates can change at any given time, it’s good to stay up to date on current rates.
Minimum balance requirements
Some banks set a minimum balance requirement to earn the stated APY, while others offer the same APY across all balances. Make a note of any minimum balance requirements to avoid any surprises.
Monthly maintenance fees and minimum balance fees can eat away at your savings. If you are considering an account with fees, consider the overall cost.
High-yield savings account alternatives
Several other account types can help you grow your money, including:
- Money market accounts are similar to savings and checking accounts because you earn interest like a savings account. Still, you can make purchases linked to a debit card like a checking account.
- A certificate of deposit, or CD, is a savings account that pays a fixed interest rate for a fixed term. However, you can only take your money out of a CD once it has been in the account for a set amount of time, called a term.
- Investment accounts can help you grow your money over time, but they come with more risk. It’s important to remember that the money in your savings account is federally insured up to $250,000, whereas non-deposit investment products are not insured.
The bottom line
Whether you’re looking to build an emergency fund or simply stash away extra cash, you can invest with peace of mind knowing high-yield savings offer competitive yields with minimal risk.
Correction, 7:30 a.m. PT Jan. 25: A previous version of this article suggested that savers can make unlimited, penalty-free withdrawals from a savings account. The article was corrected to note that some banks may still charge a fee for making more than six withdrawals per statement cycle. We’ve replaced phrases that were not entirely original.