Whether you’re saving money for an unexpected emergency or a dream vacation, a high yield savings account is a great way to boost your balance over time.
Most people saving money in a traditional savings account aren’t earning much interest right now, if any at all. In fact, the average savings account offered a return of just .07% as of May 2022, according to the Federal Deposit Insurance Corporation (FDIC).
For someone with $10,000 in a savings account for a full year, earning this paltry rate in interest would yield just $7 in growth over the course of 12 months. In five years, this rate of growth would still only yield about $35 if no other money was added to the account.
That’s why high yield savings accounts are, instead, one of the best places to keep your short term savings. You’ll get the same protections and account security as a traditional savings account, but can earn upwards of 10x the national average on your balance.
Here’s what you need to know about how these high yield accounts work, and why you may want to consider one for your short-term savings:
Understanding High Yield Savings Accounts
High-yield savings accounts work very similarly any type of traditional savings account. The biggest difference between a high yield account and a traditional savings account is the interest rate, or APY, you can earn on your balance.
Many high yield accounts are offered by online banks, or online divisions of brick-and-mortar banks, and often don’t have any physical branch locations. Because they can save on the costs associated with maintaining a branch, online financial institutions are able to offer higher yields (and often, better terms) on their savings accounts and other financial products.
In fact, savings account rates from online banks are often 10x or more than the national average. Many of the banks offering the best high yield savings account rates today have even higher interest rates, with some even over 1% APY.
There aren’t many downsides to choosing a high yield savings account from an online bank over a traditional savings account, says financial advisor Jeff Rose of Good Financial Cents. Like with traditional institutions, your savings balance in an online bank can be insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). And you can forgo any minimum balance requirements or monthly fees with many online accounts.
However, Rose does point out that you are less likely to have access to in-person assistance if you need it. Make sure you’re comfortable maintaining your account and transferring funds largely online or through a mobile app before choosing an online bank.
Average Interest Rates for High Yield Savings Accounts
In general, high yield savings accounts offer much higher interest rates than the national average. But the rates that banks offer can fluctuate very frequently. That’s because banks often base the interest they pay (and the interest they charge on loans and credit cards) on the federal funds rate determined by the Federal Reserve.
The Fed began raising rates earlier this year in an effort to combat inflation, and is expected to continue doing so for the next several months. As a result, banks will continue upping the APYs they pay on savings accounts to keep up with their competition. Many experts believe this will ultimately lead to savings account rates over 2% by the end of 2022.
Right now, the average APY of the accounts on our list of best savings account rates is 0.96%.
How Much Can You Deposit Into a High Yield Savings Account?
Like a regular savings account, a high-yield account typically does not have any limit on the amount of money you can deposit. That said, there may be some limits associated with your account that you should know.
Some high yield accounts may have caps for earning interest. These caps are typically very high ($500,000 to $1 million) but still something you should note in your account terms.
Others may lower your APY after you meet a certain balance. That’s one reason to be careful before signing up for a high yield savings account with an APY much higher than similar account types.
Some of the highest advertised rates have maximum deposit limits in place, says Robert Farrington, millennial money expert and founder of The College Investor. For example, they might say that you can earn 4% on your balance, but only up to $5,000.
“After that, the rate plummets,” says Farrington. “You want to ensure that whatever account you choose, it’s not only the best rate, but the best rate for the balance you plan to deposit.”
Another balance limit to consider is the amount up to which your account is insured. Before you open any new savings account, you should make sure the account is insured by the FDIC or National Credit Union Administration (NCUA). These institutions protect up to $250,000. If your account has FDIC coverage, that insurance is per depositor, per per FDIC-insured bank for each ownership category. For credit union accounts insured by the NCUA, credit union members can only receive up to this amount of coverage in all their joint accounts combined.
Are High Yield Accounts Higher Risk?
High yield savings accounts with online banks are a safe place to store your money. And choosing an account with FDIC or NCUA protection can keep your balance insured in case of a bank closure or other issue with the institution.
High yield savings accounts are also safe from market fluctuations that can affect more risky investment accounts. Though index funds or mutual funds may have a potentially higher yield over the long term, they are more susceptible to short-term changes in the market.
As a result, high yield savings accounts are best for short-term savings or emergency funds you may need to access on short notice. However, for long-term investments and retirement savings, it’s smart to diversify with an investment account like a Roth IRA.
Who Offers High Yield Savings Accounts?
You’re most likely to find competitive high yield savings accounts from online banks. However, some banks that offer generous yields on savings products do have some brick and mortar locations. Often, these are online divisions of a more traditional bank.
Examples of online banks that offer exceptional returns on their banking products include Barclays, CIT Bank, Marcus by Goldman Sachs and Ally. Capital One is a good example of a hybrid between the two — its Performance 360 savings is available online, but it’s also a large national bank with physical branches you can visit.
How to Choose and Open a High Yield Savings Account
Before you open any online savings account, make sure it’s insured by either the FDIC or NCUA. From there, you’ll want to compare savings accounts based on the rates they offer.
“The higher the interest rate, the more your money grows,” says Rose.
Watch out for online savings accounts that offer exceptionally high rates but have limitations on how much you may deposit. For example, some may advertise up to 4% APY, but only on the first $5,000 you deposit. If you have much more in your savings account, you may be better off with a slightly lower APY with no maximum.
There are other features that can help you narrow down your choices, too. For example, if accessibility is important to you, look for a bank that allows you to make withdrawals via ATM. Or if you prefer using your phone to make changes and transfers to your account, make sure the bank you choose has a robust mobile app, rather than just online browser access.
“Jumping through hoops to make a withdrawal for a financial emergency is the last headache you want to deal with,” says Rose.
Other things to look for include monthly fees, whether the account has a minimum deposit requirement, or if you need to maintain a certain balance to earn interest or keep the account open.
Fortunately, opening a high-yield savings account is simple once you find the one you want. All you have to do is select the option to open an account online, and provide personal details such as your name, your address, your Social Security number and additional contact information. From there, you can fund your online savings account by transferring funds from another bank account.
Ultimately, there are plenty of great high yield savings accounts today that can help you earn a great APY without charging hidden fees or costly minimum. The most important thing is to simply start saving. Choose an account with the features and APY that works for you, and make a habit of adding to your balance regularly.
You may also want to set up direct deposits every month into your account, so you can make contributions passively. Even if you’re only able to save a few dollars at a time, your overall balance can add up quickly.