What is a high-yield savings account?
If you're looking for a safe place to stash extra money for an emergency or more exciting goals like a vacation or wedding, then a high-yield savings account may be right for you.
A high-yield savings account is an interest-earning account typically offered by online banks and credit unions that offers a substantially higher interest rate than you'd find with a traditional savings account, so you can earn more than an average savings account and still have access to your money.
If you're interested in pursuing a high-yield savings account, start by checking what kind of rates you can earn on your money now.
What is a high-yield savings account?
A high-yield savings account functions like another other savings account. When you deposit money in a savings account, the bank pays you compound interest to keep your money parked there. When you earn interest during one period, the bank deposits that money into your account. Then the next period, your account earns interest on your new account balance and the growth snowballs over time. The rate of compound interest your account earns over a year is expressed as the annual percentage yield, or APY.
Here's a breakdown of the amount of interest you might earn with a standard savings account versus a high-yield savings account:
$1,000 balance: $1.00 after one year with a regular savings account with 0.10% APY/$17.50 after one year with a high-yield savings account with 1.75% APY$5,000 balance: $5.00 after one year with a regular savings account with 0.10% APY/$87.50 after one year with a high-yield savings account with 1.75% APY$10,000 balance: $10 after one year with a regular savings account with 0.10% APY/$175 after one year with a high-yield savings account with 1.75% APY$25,000 balance: $25 after one year with a regular savings account with 0.10% APY/$437.50 after one year with a high-yield savings account with 1.75% APY
Keep in mind, savings accounts have variable interest rates that are always fluctuating. Generally, your account's APY may rise when the Federal Reserve hikes interest rates and fall when the Fed lowers them. The Federal Reserve has increased the federal funds rate several times this year, so it's a good time to open a high-yield savings account. Lenders are available to help you get started today.
What is the difference between a traditional savings account and a high-yield savings account?
The key difference between high-yield savings accounts and regular savings accounts is that high-yield savings accounts may earn you more money. Currently, the national average interest rate for savings accounts is 0.10% APY, according to the Federal Deposit Insurance Corporation (FDIC). By contrast, a competitive high-yield savings account might pay 1.75% APY or higher, over 17 times higher than the average interest rate for traditional savings accounts.
How to choose a high-yield savings account
There are a few essential factors to consider when choosing a savings account, including:
Interest rate: While the interest on the average traditional savings account is 0.10%, some brick-and-mortar banks are still offering paltry 0.01% APRs. You may be able to find high-yield savings account offers online with interest rates ranging from 1.50% to 2% or higher. Fees: Most banks charge fees when you withdraw from your savings account more than six times. As long as you don't do anything unusual, like withdraw more money than you have in your account, you shouldn't have to pay any fees.Minimum balance: Depending on the bank, you may earn the stated APY only by meeting a specific minimum balance threshold, or you could earn the same APY regardless of your balance.Compounding frequency: Banks may compound interest daily, weekly, semi-annually or annually. Theoretically, the more frequently interest compounds, the faster your money will grow.Access: Any savings account you're considering should be able to link to any external accounts you have free of charge so you can deposit funds easily.Secure: FDIC-insured banks protect your savings account funds up to the legal limit, currently $250,000 worth of protection per account holder.Types of high-yield savings accounts to consider
A high-yield savings account isn't the only place to park your money for higher returns than traditional savings accounts. Other alternatives you might consider include:
Money market account: If you like high-yield savings accounts but you want your account to offer more flexibility, a money market account might make sense. Money market accounts operate like high-yield savings accounts, but they allow you to write checks, something most savings accounts prohibit. Also, money market accounts invest your funds in low-risk securities, which may provide a higher interest rate than standard savings accounts while remaining relatively safe.Certificate of deposit (CD): CDs can provide a high-interest rate on your deposit, but you must keep your money in the CD for a specific period. If you withdraw the money early, you'll incur a penalty.Cash management accounts (CMA): Cash managements also have APYs that are typically higher than what most brick-and-mortar banks provide with their savings accounts. Generally, these accounts combine features like checking, savings and investment accounts in one product. Investment accounts: Investing in the stock market can provide a significantly higher return on your investment than a high-yield savings account. However, investment accounts are much riskier, and you can lose money if your stock investments drop in price.
As you compare high-yield savings accounts and other account alternatives, think about which option best meets your financial needs and goals. Have more questions about this sort of savings account? Not sure if it's the best option for you? An online financial advisor can help steer you in the right direction.
Pros and cons of high-yield savings accounts
As with any financial product, it's important to weigh the benefits and downsides before making your decision.
ProsThe interest rates for high-yield savings accounts outpace the average returns of traditional savings accounts.You can access the money in your high-yield savings account if you ever need it.Online banks usually have lower minimum deposit requirements when you open your account.Many high-yield savings accounts come with no monthly fees or other additional costs.ConsWith variable interest rates, your APY can change at any time, so you may not keep your initial APY for long.Most online banks offering high-yield savings accounts don't have a physical branch office where you can deposit funds in person.While it's easy to transfer money between your online savings accounts and accounts at other banks, the process can take up to a few business days to complete.You can usually withdraw or transfer money from your account up to six times per month before incurring a penalty fee or risking the closure of your account.
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