What is a High-Yield Savings Account?

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Your money doesn’t have to just sit in the bank. A good way to earn interest on your money while keeping it readily available is a high-yield savings account. These are similar to standard savings accounts that most banks offer, except you receive a higher interest rate on your deposits.

The average annual percentage yield, or APY, on a high-yield savings account was 0.07% in May 2022, according to the Federal Deposit Insurance Corporation (FDIC).

Here’s what to know about high-yield savings accounts and how to shop for one:

What is a high-yield savings account?

A high-yield savings account works much like any other traditional savings account. You deposit your money and the bank holds on to it for you. You may use a savings account to store money for short-term financial goals, like a vacation or down payment on a house, or to build an emergency savings fund. You generally don’t use money in a savings account for everyday purchases. Balances are insured by the FDIC for up to $250,000, so you don’t need to worry about losing your money if the bank goes out of business.

With a savings account, you can access your money at any time by transferring it to a checking account or by withdrawing it. Under federal regulations, you’re usually limited to six withdrawals or transfers per month from a savings account. In exchange for keeping your money, the bank will pay you interest on your deposits. This is generally calculated as a percentage of your balance, and is often credited to your account each month.

The main difference between a high-yield savings account and a traditional savings account is the interest rate the bank offers to pay you. Traditional accounts may have extremely small interest rates, such as 0.01% APY. A high-yield savings account will be significantly higher, often 0.80% or more. This makes your money grow more quickly.

Good to know: In exchange for the higher interest rate on a high-yield savings account, you may have to give up other conveniences. Many high-yield savings accounts are offered by banks that don’t have brick-and-mortar branches, so it can be less convenient to withdraw money if you aren’t comfortable with digital banking.

The options in the table below are Credible partners:

What to look for in a high-yield savings account

As you shop for a high-yield savings account, be sure to look closely at the following:

  • Interest rate/APY: A higher interest rate is the main reason you’re opening a high-yield savings account, so you’ll want to pick an account with one of the highest rates on the market. But before you open the account, make sure the rate you see isn’t just an introductory rate that will fall after a short period of time.
  • Minimum deposit amount: Many financial institutions require you to make an initial deposit of a certain amount to open a savings account. This can often be $500 or $1,000, but minimum deposits vary from bank to bank. Some don’t have a minimum at all.
  • Minimum balance required: Some banks will require you to have a certain amount of money deposited in your account to earn the highest rate of interest. This can sometimes be a high number, such as $25,000. Other banks, however, will pay their highest APY on a single dollar. So, evaluate how much money you’re likely to keep in your savings account and compare it to any minimum balance required by the account you’re considering.
  • Fees: Banks may charge a monthly maintenance fee, which can often be waived if you keep a certain amount of money in your account. You may also have to pay fees if you make more than six transfers in the same month. Ask the bank for a schedule of fees, and compare them with how you expect to use your account.
  • Deposit options: Some high-yield savings accounts may only allow you to transfer money from another account, while others may allow you to deposit checks or cash. Evaluate how you want to fund the account, and make sure the account you open offers that option.
  • Compounding frequency: This refers to how often interest accrues on your account. When your interest is compounded, you begin earning interest on your interest — not just on the amount you deposited. The more frequently your interest compounds, the faster your balance grows. Many high-yield savings accounts compound interest daily, while others may be monthly or quarterly.

How to open a high-yield savings account

Opening a high-yield savings account is typically a fairly easy process. Here’s how to get it done:

  • Research your options. Begin by researching the best high-yield savings account that meets your needs. Find banks that offer the highest APYs, with the deposit options you need and minimum balance requirements that fit your finances.
  • Apply for an account. When you’ve found the account you want to open, you can apply for it on the bank’s website. You may also be able to call the bank or visit a branch, if one is convenient to you. When you apply, you’ll give the bank some personal information, such as your name, address, and Social Security number. You may also be asked to submit a copy of your driver’s license or some other form of identification.
  • Fund your account. If your application is approved, you’ll need to put money in your account. If your bank has minimum deposit requirements, you’ll need to meet them. You can generally transfer money from another financial institution into your new account. You may also be able to deposit a check or begin a direct deposit from your employer.

Is a high-yield savings account a good idea?

If you’re saving money for short-term financial goals and are reasonably tech savvy, a high-yield savings account can be a great option. These accounts pay the highest levels of interest, helping your money grow faster than it will in any other type of savings account. At the same time, you have the convenience of being able to withdraw money when you need it and the security of insurance from the FDIC.

However, if you need a bank account for paying bills and making day-to-day purchases, a high-yield savings account isn’t the right choice. You’ll face penalties after making more than six transfers in a month. A checking account will be a better bet for you. On the other hand, if your financial goals are strictly long-term (like saving for retirement), you may be able to get a better return on investment from a different type of account — like an IRA.

If you decide a high-yield savings account is right for you, be sure to research your options carefully. Find an account that will pay you a high APY while allowing you to avoid fees and other charges from actions you regularly take.

This higher interest rate can make a high-yield savings account ideal if you’re saving for an emergency fund, vacation, new car, down payment, and more.

💵 See How Much You Could Save 💵

*National average accurate as of September 2020 and is subject to change.

About the author
Andrew Dunn
Andrew Dunn

Andrew Dunn is an award-winning mortgage and finance writer with a decade of experience covering the industry with articles published at Fox Business, LendingTree, Credit Karma, Axios Charlotte, and more.

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