What Is a High-Yield Savings Account?

You can grow your money faster with a high-yield savings account.

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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. 

The interest rate associated with a high-yield savings account is noted as APY, or annual percentage yield. The higher the APY, the faster your money grows. But keep in mind that this is a variable rate, and it fluctuates as the Federal Reserve updates its benchmark interest rate. 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 APY is applied to the balance in your high-yield savings account as 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. 

A pandemic-era federal law known as Regulation D now made it easier for you to access your savings deposits without penalty, as it eliminated a limit of six monthly penalty-free withdrawals. However, your bank may still charge penalties for other types of transfers.

To open a high-yield savings account, you must provide your Social Security number and contact information, along with at least one form of identification, such as a driver's license or a passport. For a joint account, everyone wanting access must provide this information and ID.

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; however, your bank may charge fees in some circumstances. 
  • 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. 
  • Zero risk but limited return: Though many high-yield savings accounts offer a variable APY, they are still lower than other financial tools, such as money market accounts

What should you look for in a high-yield savings account?

When choosing a high-yield savings account, consider the following terms:

APY

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.

Fees 

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 and the corresponding due dates to avoid surprises.

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.