What is the difference between a high-yield savings account and a standard savings account? For most Americans, opening the latter is the first step in taking control of their personal finances. However, while it can be an important, safe way to keep cash available, a standard savings account is going to earn a scant amount of interest. Factor in inflation and it could actually lose money for depositors over time.

Many high-yield savings accounts (also known as high-interest savings accounts), on the other hand, offer the same Federal Deposit Insurance Corporation (FDIC) coverage as banks and thrifts – or National Credit Union Administration (NCUA) insurance for state-chartered credit unions – and pay a significantly higher rate of interest. In other words, they’ll help you meet your goals faster. Read on to learn more about these types of accounts and how to choose one. (For more, see Are Your Bank Deposits Insured?)

High-yield savings accounts are deposit accounts available through online or brick-and-mortar banks that pay a higher interest rate or an annual percentage yield (APY) than a traditional deposit savings account. (For more, see, APR and APY: Why Your Bank Hopes You Can’t Tell the Difference.)

If the bank that you open the account with is an FDIC-insured bank, then your funds are insured by the federal government for up to $250,000. If you open an account through a credit union that is insured by the NCUA, then your money is secured up to $250,000 through the National Credit Union Share Insurance Fund. You can find a list of NCUA-insured credit unions through NCUA’s website and a list of FDIC-insured banks through the FDIC’s BankFind web page.

Numerous financial institutions offer high-yield savings accounts. Start by asking the staff at your bank branch to see if it offers such an account or if, based on your banking history and current account status, it could offer a higher rate of interest for your current savings account. If neither is available, consider inquiring at other bank branches in your area. A number of online banks also offer high-yield savings accounts. 

What to Look For

Since you'll probably have to keep more money in the bank to get a high-yield savings account, be sure to compare account offerings carefully. Here's what to check: 

  • Required Initial Deposit – How much money do you have to deposit to open the account?
  • Rate of Interest Paid – How much interest will you earn on your deposits, and how long will that interest rate last? Is it an “introductory” rate that changes at a certain point, or is it the permanent rate?
  • Annual Percentage Yield (APY)  How much does the APY have the potential to earn? The APY takes into account the interest rate and the number of interest-earned postings or compound interest. The savings account's interest rate is the primary factor, but your APY will be greater than your interest rate, because it takes into account the frequency with which the interest is applied. 
  • Compounding Method – How is the interest compounded and calculated on your savings? There are several compounding methods, including daily, monthly, quarterly, semiannually and annually.
  • 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 your funds in this account and other bank or brokerage accounts, so that you can easily transfer money in and out of the account?
  • Application/Account Set-Up and Maintenance Fee – How much does the bank or credit union charge you to apply for and/or set up the new account? Is there an ongoing monthly, quarterly or annual fee to keep account privileges?
  • Required Additional Accounts – Does the bank require that you open or hold an additional account, such as a checking account, in order to open the savings account or to access/withdraw funds from the account? For example, an HSBC Advance account, which requires a companion checking account, has a 0.01% interest rate for anything from $0 to $14,999. Above that the rate increases to 0.05%. By comparison, an HSBC Direct Savings online account does not require a companion checking account, but it has a limit of six transactions per month, which includes withdrawals and transfers to other accounts. Because the account is meant to be used as a savings account, not a checking account, you do not get an ATM card with it. Moreover, if you make more than six transactions, the account is subject to closure. As with HSBC, you need to deposit a minimum amount to get the better interest rate, which as of May 31, 2018, was 1.60% APY for balances of $15,000 or more.
  • Number of Transactions Permitted – Is there a limit on the number of times you can withdraw or transfer money out of the account each month?
  • Handling Deposits – This is especially important to know if you are opening an account with an online bank. How will you be able to make deposits into the account – by mail, wire, bank transfer or can you use another bank’s ATMs? Can you have your paycheck directly deposited from your employer’s account?
  • Accessing Funds – What options are available to withdraw 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?

Factoring a High-Yield Savings Account into Your Portfolio

A high-yield savings account should be just one portion of your overall financial portfolio. Consider how you could best use the account to complement your other saving and investment strategies. For example, determine how much cash you want to keep liquid through a high-yield savings account: Is it a set dollar amount (i.e. $2,500, $5,000 or $10,000) or enough money to cover a specific amount (i.e. three to six month’s worth of expenses in case of emergency)?

Next, determine what you will do once you reach that financial threshold. What is your next best option? 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? 

At the same time consider how you could use your account to hold money and earn interest while making investment transactions and decisions. For example, some high-yield savings accounts let you roll into that account the principal and interest earned on a CD issued by the same institution upon the CD’s maturity, without penalty.

The Bottom Line 

High-yield savings accounts often represent a safe, insured way for individuals and families to earn more interest than is possible with a standard savings account. Consider opening an account that provides you with the flexibility and financial requirements you need to fight against inflation and keep your savings secure.