You may already know that savings accounts let you earn money just by keeping cash in the bank. But with a national average annual percentage yield (APY) of just 0.06% for standard savings accounts, you might be wondering if such a paltry return is worth your while.
That’s where high-yield savings accounts come in.
The typical high-yield savings account can earn upwards of 0.50% APY right now, more than eight times the rate of return from traditional savings accounts. “A high yield savings account doesn’t have the high returns of other investments such as mutual funds, but it doesn’t expose you to any risk, either,” says Brent Kaspar, managing partner at Kaspar & Lugay LLP and CPA. If you have cash that you need to keep secure and easily accessible — such as your emergency fund or savings for short-term goals — then a high-yield savings account is the best place to store it.
Before you open a high-yield savings account, here’s what you need to know about how they work and what to look for when exploring your options.
What Is a High-Yield Savings Account?
A savings account is a deposit account offered by traditional banks, credit unions, and online banks that lets you store your money safely and earn interest on the balance. A high-yield savings account is a savings account that offers a higher-than-average interest rate, or annual percentage yield (APY).
There are no universal guidelines for what constitutes a high-yield savings account, but generally, any savings account with an APY of 0.50% and above would be considered high-interest in this current rate environment. By comparison, the national average savings account APY is 0.06%, according to the Federal Deposit Insurance Corporation (FDIC).
How Do High-Yield Savings Accounts Work?
High-yield savings accounts operate like other savings accounts. When you make deposits, the bank lends your money to others, with interest, to earn a return. The bank also pays you a set return on the money you keep in the account, known as the annual percentage yield or interest rate.
Interest rates on high-yield savings accounts can vary widely depending on the financial institution. Online savings accounts often offer higher APYs than traditional savings accounts from brick-and-mortar banks, as online-only banks typically have lower overhead costs and can pass those savings along to the consumer. Credit unions, which are non-profit organizations designed to serve their members, can also offer competitive rates. If you want to open a high-yield savings account, it’s wise to compare rates and fees from multiple financial institutions in order to find the best option for you.
Before opening a high-yield savings account, do your research to find options that are federally-insured, offer a good APY, and have features that work for you.
If you keep your money in a savings account long enough, you’ll benefit from compound interest. This means that you can earn interest on your interest. How often interest compounds in your savings account — meaning how often interest is paid out and added to your original balance, to keep earning interest — also affects how much you earn.
You can transfer funds in and out of a high-yield savings account with ACH transfers or direct deposit, just like with a checking account. However, unlike checking accounts, savings accounts typically don’t come with access to a debit card or the ability to write checks. In addition, savings accounts are subject to Federal Reserve Board Regulation D, which limits transfers and withdrawals to 6 transactions per month. If you go over that limit, you could be charged a fee by your bank or credit union.
“A high-yield savings account is a good place to keep shorter-term savings, where you can easily withdraw funds in the event of a financial emergency,” Kaspar says. In addition to being a secure place to store your emergency fund, a high-yield savings account can help you save for short-term goals like a wedding, vacation, or major purchase.
However, high-yield savings accounts are not ideal for making purchases or paying bills due to the monthly transaction limit. Instead, you should use a checking account for your everyday spending and transfer money from your savings account to your checking account as needed. A money market account is another option that can provide similar interest rates to a high-yield savings account while offering some of the conveniences of a checking account.
For longer-term goals like retirement, a high-yield account is not the best option either, says Kaspar. Over the long term, you’ll see far greater returns by investing in the stock market. As long as you have a diversified portfolio — such as one consisting of different index funds — and properly manage your risk, your money can grow at a much faster rate than even the best high-interest savings accounts can offer, with only a minimal increase in risk.
The math on high-interest savings accounts
|Balance||Interest Earned Over One year With High Yield Savings Account (0.5% APY)||Interest Earned Over One Year With Regular Savings Account (0.06% APY)|
What to Look for in a High-Yield Savings Account
It’s tempting to go with the first high-yield savings account you find with a generous APY. But that’s not the only thing you should pay attention to when choosing a savings account. Here are some other factors experts say to consider:
Online savings account vs. traditional savings account
Online banks boomed during the COVID-19 pandemic, when stay-at-home restrictions forced many people to take their banking activities virtual. For those who are comfortable with technology, an online bank can offer certain conveniences, like the ability to deposit checks, transfer money, and view your account status from your browser or phone. That’s not to say traditional brick-and-mortar banks are lagging behind when it comes to technology, either. Most of the larger traditional banks now offer online and mobile banking options in addition to their brick-and-mortar branches, providing a hybrid experience.
However, one area where online savings accounts tend to have an advantage over standard savings accounts is the APY. While there are some brick-and-mortar banks and credit unions that offer competitive interest rates, you’re more likely to find a high-yield savings account at an online-only institution.
“If you are a person who likes the ability to go to a brick-and-mortar bank rather than do business with an online one, you will likely have fewer choices, and your annual percentage yield is likely to be lower than average,” says Danielle Miura, CFP® and founder and owner of Spark Financials, a fee-only firm located in Ripon, CA.
However, brick-and-mortar banks can offer some advantages over online banks, such as the ability to easily deposit and withdraw cash and in-person customer service.
Fees and minimum balance requirements
The point of a high-yield savings account is that the bank pays you money, not the other way around. Yet some banks charge monthly fees that can quickly eat into any interest earnings you make.
Kaspar recommends that consumers shop around to find a high-yield account with no monthly service fees, maintenance fees, or minimum balance requirements.
Some banks may charge monthly maintenance fees but waive them if you meet certain requirements — such as maintaining a minimum daily balance or having a certain number of direct deposits every month. If that’s the case, you should carefully consider whether you can consistently meet those requirements and whether the bank offers enough other benefits to be worth using over one that doesn’t charge any monthly fees.
“Be sure to check that your account is insured by the Federal Deposit Insurance Corporation (FDIC). This will help protect your assets in case of a bank failure,” says Miura.
If you’re considering opening a high-yield savings account at a credit union, confirm it’s insured by the National Credit Union Administration (NCUA). Both FDIC and NCUA-backed banks and credit unions have deposit insurance of up to $250,000 per person per account.
Actions needed to get a high APY
Some savings accounts may offer a baseline APY and an option to earn a higher APY if you take certain actions or fulfill certain requirements. These requirements can range from maintaining a certain monthly balance, linking a checking account from the same institution, or having a certain number of direct deposits to your account every month. These are most common among high-yield savings accounts offered by online banks and new financial technology companies.
While the lucrative interest rates offered by these accounts can seem tempting, be sure you understand what you need to do to get the higher APY and what the baseline APY is before you sign up. If you’re confident you can consistently meet the requirements to get the elevated rate, or the savings account offers other benefits that make it a good fit for you, these high-interest savings accounts can be a good place to store your cash.
“Convenience” means something different to everyone, so start by looking at your own banking habits and thinking about what you want out of a bank.
Do you need a user-friendly mobile app or online banking portal? Do you want frequent access to fee-free ATMs in your area? Do you care about access to a physical branch or in-person customer service?
At the minimum, “you want a high-yield savings account with an easy-to-understand interface and customer service team that is easily accessible if anything goes wrong,” advises Miura.
One additional factor to consider is whether you want your savings account to be at the same bank or credit union where you have your checking account. Doing so can have certain advantages, such as quicker transfers between your savings and checking accounts, and only one login to manage. But if the bank where you have your checking account doesn’t offer high-yield savings accounts with a high APY or good benefits, then it might be worth it to consider other options.
Ultimately, there are many high-yield savings accounts on the market, but you should try to find one that best serves your needs while having a high APY, says Miura.
How to Open a High-Yield Savings Account
Opening a high-yield savings account is relatively easy and shouldn’t take much of your time. Here’s how to do it:
- Research options. Look for a high-yield savings account with a generous APY, minimal fees, and other features that meet your needs. Check out online banks, traditional banks, or your local credit union if you qualify for membership.
- Complete an online application or visit a physical branch to apply. You’ll generally need to provide your name, date of birth, Social Security number, phone number, email address, physical address, proof of residency, and driver’s license or passport number. After you fill out the application, submit it for review.
- Await a decision. You could hear back right away, but it may take a few days to receive a response.
- Make your opening deposit. Some financial institutions allow you to make your opening deposit electronically by transferring from an external bank account. Otherwise, you’ll need to use cash or deposit a check. Some accounts may have minimum deposit requirements to open an account.
- Set up your online account. If you didn’t do this during the initial application, you’ll need to create login credentials to access your account through your institution’s online banking dashboard and mobile app.
- Manage your account. Set up automatic transfers from another bank account or manually deposit additional funds as you see fit, and watch your money grow.