For most Americans, opening a standard savings account is the first step towards taking control of their personal finances. But for all the safety and reliability of these basic accounts, they're anything but lucrative. The interest rates they offer are so scant that—once inflation and fees are factored in—you could actually lose money on the account over time.
Consider opening a high-yield savings account, also known as a high-interest savings account, to replace or supplement a standard account. As the name suggests, this is a deposit account that pays a higher interest rate and/or annual percentage yield (APY) than a traditional deposit savings account.
Even as they pay more, high-yield accounts share the same reassuring security as their regular cousins. That is, the Federal Deposit Insurance Corporation (FDIC) secures the balance of accounts in banks or thrifts, and the National Credit Union Share Insurance Fund covers accounts at credit unions. You can find a list of FDIC-insured banks through the FDIC’s BankFind web page and a list of NCUA-insured credit unions through NCUA’s website.
To begin the process of getting a high-yield account, ask the staffers at your bank or credit union if they can offer you an account with a higher rate of interest than your current one. If they can't, consider shopping for a high-yield account at other institutions, both brick-and-mortar and online.
What to Look For
Even if your current bank offers a high-yield option, it may be wise to compare what's available elsewhere. Differences in interest rates and fees can add up over time, especially with the relatively large balance you may have to keep in a high-yield savings account.
Here are points to help you assess and compare high-yield accounts:
- Required Initial Deposit – How much money is required in order to open the account?
- Rate of Interest – How much interest will you earn on your balance, and will that rate be temporary? As in, is the interest rate “introductory," and likely to change at a certain point, or a permanent rate that should continue indefinitely?
- Earnings from Compounding – The interest rate is the primary driver of the yield on a savings account, but how that interest is compounded and calculated also affects the yield. There are several compounding methods, including daily, monthly, quarterly, semiannually and annually. The more often interest is compounded, the greater the yield. The account's APY takes compounding into account, reflecting both the interest rate and the frequency with which the interest is applied.
- Minimum Balance Required – How much money are you required to keep in the account to earn the advertised rate of interest?
- Links to Other Bank and/or Brokerage Accounts – Does the account allow you to create links between the funds in this account and those you hold in other bank or brokerage accounts? Such a connection will allow you to easily transfer money in and out of the account..
- Application/Account Set-Up and Maintenance Fees – How much does the bank or credit union charge you to initiate the new account? Is an ongoing monthly, quarterly, or annual fee levied to keep the account open?
- Required Additional Accounts, With Possible Restrictions – Banks sometimes require you to have an additional account, such as a checking account, in order to open the savings account or to access/withdraw funds from it. Sometimes you must open those additional accounts in order to earn the bank's best high-yield interest rate. You may need to assess whether the utility, hassle, and possible additional costs of those supplementary accounts still make the high-yield account a worthwhile and profitable option for you.
- Number of Transactions Permitted – Check for limits on the number of times you can withdraw or transfer money out of the account within a given month.
- Deposit Options – This is an especially important consideration when considering an account with an online bank. How will you be able to make deposits into the account – by mail, wire, bank transfer? Are you able to do so by using the ATMs of other banks? Can your paycheck be directly deposited into the account?
- Accessing Money – What options are available for withdrawing funds? Can you write checks against the account? Transfer funds electronically? Use an ATM and, if so, through what ATM network and at what cost?
High-Yield Accounts and Your Finances
A high-yield savings account should, of course, comprise only a part of your overall financial portfolio. Consider how you might best use the account to complement other savings and investment accounts and strategies.
For example, determine how much cash you think it's prudent to keep liquid through a high-yield savings account. Is that figure a set dollar amount (i.e. $2,500, $5,000 or $10,000) or an estimate of the money you'd require to cover a specific circumstance (i.e. three to six months' worth of expenses in case of a family emergency)?
Next, determine what actions you should take once you reach that financial threshold. Will you move money out of the account and into another interest-bearing account or investment instrument, such as a money-market fund, certificate of deposit (CD), or mutual or bond fund? You might also consider such alternatives as paying down debt, starting a business, or beginning a college fund for your children.
At the same time, consider how best to move funds in and out of the high-yield account. For example, some accounts allow you, without penalty, to roll into the account the principal and interest earned on a CD issued by the same institution, when the CD matures.
The Bottom Line
A high-yield savings account can be a useful middle ground for your money, offering both the safety of federal insurance and a yield that's higher than a regular account, if less than you might earn from a riskier investment. But before you open such an account, review how it fits within your finances as a whole. That perspective will help you decide how much to deposit in the account and what features you may need.