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What Is a High-Yield Savings Account?
A high-yield savings account is a type of savings account that typically pays 20 to 25 times the national average of a standard savings account. Traditionally, people have held a savings account at the same bank where they hold their checking account, making transfers between the two easy and quick. But with the advent of internet-only banks, as well as traditional banks that have opened their doors to customers across the country using online account opening, the competition on savings rates has skyrocketed, creating a new category of "high-yield savings accounts."
Given the difference between high-yield savings account rates and the national average, the increase in earnings is significant. If you're holding $5,000 in savings, for instance, and the national average is 0.10 percent APY, you would return just $5 over the course of a year. If you instead put that same $5,000 in an account earning 2 percent, you'd earn $100.
- The interest rates on high-yield savings accounts can be 20 to 25 times higher than what traditional savings accounts offer.
- You may be able to open a high-yield savings account where you already bank but the highest rates are often available only from online banks.
- Electronic transfers are easy to set up between a high-yield savings account and your checking account even if you hold them at different banks.
- As you consider different high-yield savings account options, weigh factors such as initial deposit requirements, interest rates, minimum balance requirements, and any possible account fees.
The trade-off to earning significantly more is that you may need to hold your savings account at one institution and your checking account at another. While this may initially feel awkward if you're used to both accounts being held at one bank, today's availability of electronic transfers between institutions—and the speed at which those transfers can be executed—make moving money between your checking account at Bank A and your savings account at Bank B a relatively simple matter.
You may also find that, unlike traditional brick-and-mortar institutions that offer a one-stop shop for all your banking needs, the institutions offering high-yield savings accounts typically limit their features or offer few or no other products. Many don't offer checking accounts and few provide ATM cards, requiring all inflows and outflows to the savings account to occur by electronic bank transfer or mobile check deposit if it's available.
But rest assured that one important feature is the same between traditional savings accounts and their high-yield counterparts: the federal insurance you're provided against bank failures from the Federal Deposit Insurance Corporation (FDIC) and credit union failures from the National Credit Union Association (NCUA). Whenever you're considering opening an account at a new institution, simply check that it is an FDIC or NCUA member.
You'll also find that the federal regulation limiting withdrawals from a savings account to six per monthly cycle will be in effect on any kind of bank savings account, whether it's a traditional or a high-yield account. Given all this, it's worth learning how to find and open a high-yield account and considering whether it would be worth adding one to your financial portfolio.
Deciding How You'll Use a High-Yield Savings Account
A high-yield savings account should, of course, make up only a part of your overall financial portfolio. Consider how you'll best use the account to complement your other savings and investment strategies and from there determine how much cash you think is prudent to keep liquid for your particular situation.
For instance, is the savings account meant to serve as an emergency fund? In that case, financial experts typically recommend having three to six months' worth of living expenses on hand.
Perhaps instead you're using a high-yield account to save up for a large purchase, such as a house, a car, or a big vacation, which you'll make within the next five years. On that time horizon, it's best not to put the funds into investments that could lose their value. So periodically socking funds away in a high-paying savings account can help you protect your principal while applying interest earnings to your savings goal.
Still others will open a high-yield savings account not for a specific purpose but simply to house surplus cash that they sweep out of their checking account. Since checking interest rates are generally minuscule or zero, moving extra funds into savings when you don't need them to cover day-to-day transactions can provide a monthly interest payment you wouldn't otherwise earn.
Of course, more than one of these options can be employed to segregate your savings for simultaneous uses or goals. Many institutions allow you to open more than one savings account and even give them personalized nicknames (e.g., Car Fund, Vacation 2020, etc.). Or you can open a high-yield savings account at more than one top-paying institution. Multiple savings accounts can facilitate easy tracking of your progress toward goals and make it simpler to keep your hands off money you don't want to touch, such as your emergency fund.
What to Look for in a High-Yield Savings Account
Whether you're shopping for a high-yield account at a new institution—or are lucky enough to have one on offer at your current bank—it's always wise to compare options across the marketplace. Differences in interest rates and fees can add up over time, especially if you're keeping a relatively large balance in savings. Here's what to look for and compare:
1. Interest Rate
How much interest does the account currently pay? Is it a standard rate or an introductory promotional rate? Savings account rates are generally flexible and can be changed at any time. But some accounts will specify that the currently advertised rate is only available for an initial period of time. Another factor to look for is whether there are minimum or maximum balance thresholds for earning the promoted rate.
2. Required Initial Deposit
How much money is required to open the account and are you comfortable depositing that much at the outset?
3. Minimum Balance Required
How much money are you required to keep in the account going forward? You'll want to feel comfortable with always meeting the minimum threshold because falling below it can incur fees or invalidate the interest rate you're expecting.
Does the bank or credit union charge any fees on this account? If so, what are the ways you can avoid it (e.g., always keeping your balance above the minimum threshold)? Also, if you exceed the federally mandated limit of six withdrawals per month, what is the bank's fee for the violation?
5. Links to Other Banks and/or Brokerage Accounts
Will the bank allow you to create links between your high-yield savings account and deposit accounts you hold at other banks or brokerages? Are there restrictions on linking multiple accounts or a waiting period for new accounts during which you cannot change your initial linked account?
6. Accessing Your Money
What additional options, if any, are available for withdrawing funds? Can you withdraw funds from savings using an ATM card?
7. Deposit Options
If you expect you'll want to deposit checks into the account, does the bank have a smartphone app that offers mobile check deposit? Otherwise, will you be able to mail in checks or deposit them by ATM?
8. Compounding Method
Banks can stipulate that interest will be compounded daily, monthly, quarterly, semiannually, or annually. While more frequent compounding will theoretically increase your take-home yield, if you stick to comparing accounts by APY instead of annual interest rate, the compounding factor will already have been taken into account.
How to Open a High-Yield Savings Account
If you're lucky enough to have a competitive high-yield savings account available at your current bank, opening the new account will be a breeze. It will likely be possible through your online banking portal with little need to enter personal information since you will already be verified with the institution.
If you're opening a savings account at an institution that is new to you, the process will be more involved, though none of it will prove overly complicated. Almost all high-yield savings accounts can be opened online, so you'll want to set aside 15 minutes or so when you can fill in the electronic application on your computer. You'll also want to have your driver's license, Social Security Number, and primary bank account information at hand to facilitate the application process.
Where can a consumer find a high-yield savings account?
Online banks are offering the highest rates. Still, you may be able to open a high-yield savings account where you already bank.
What are the main things to look at in a high-yield account?
Read up on and compare factors such as initial deposit requirements, interest rates, minimum balance requirements, fees, links to other banks and/or brokerage accounts, access to your money, deposit options and compounding method.
The Bottom Line
A high-yield savings account can be a useful middle ground for your money, offering protection of your principal, the safety of federal insurance, and a yield that's higher than a regular savings account though less than you could potentially earn from riskier investments. Just be sure to think through how one or more high-yield accounts can best serve your financial goals and situation. Then, do your homework to find an account that will maximize your earnings at the same time that it lets you avoid fees without imposing restrictions that don't fit your needs.
FDIC. "Weekly National Rates and Rate Caps - Weekly Update."
National Credit Union Association. "How Your Accounts Are Federally Insured," Pages 1-2.
Federal Deposit Insurance Corporation. "Insured or Not Insured?"
Federal Reserve. "Regulation D1 Reserve Requirements."