Quick and easy guide to high-yield savings accounts

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In a Nutshell

If you want to earn more for every dollar stashed outside of stocks and bonds, a high-yield savings account can be a great place to start.

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A high-yield savings account is a type of savings account where you can deposit money and generally earn a higher interest rate on your deposits than you would with a traditional savings account.

Since high-yield savings accounts may be insured by the government like traditional savings accounts, they can be a good place to keep any cash you may need in the future without the risk of stocks or the withdrawal limitations of retirement accounts.

Let’s look at what a high-yield savings account is, how to choose one, and how to make the most of this type of savings account.



What are high-yield savings accounts?

High-yield savings accounts are bank accounts that earn you a higher interest rate for deposits than a traditional savings account. You might also see them referred to as high-interest rate savings accounts. When it comes to savings, a higher interest rate is the name of the game. It means a better return on your money. The interest rate is what the bank will pay you for the privilege of keeping your money.

For example, it’s not uncommon to get a 0.01% interest rate on a traditional savings or checking account, while interest rates on high-yield savings accounts can range anywhere from about 0.4% to 0.9%. Here’s how that difference plays out in real life based on a balance of $10,000 after one year, assuming no additional deposits.

Type of savings account Interest rate Balance after one year (based on monthly compounding)

High-yield savings account

0.9%

$10,090.37

Traditional savings account

.01%

$10,001

That’s a difference of about $90 a year, and that gap starts to widen the minute you make monthly deposits to boost your savings.

For example, if you made $100 monthly deposits — the equivalent of $1,200 a year — your year-end monthly balance on the low-interest savings account would be $11,201.06, compared to $11,295.33 with a high-yield savings account. Over time, this adds up.

One caveat: High-yield savings accounts can come with monthly maintenance fees and/or requirements to maintain a minimum balance. But some accounts offered by banks don’t have these requirements or fees.

When you do see them, it’s important to make sure the fees don’t cancel out the interest you expect to earn. After all, the goal is to make your money work for you. You can check using the same compound interest calculator. Search the terms and conditions for how frequently they compound interest: It’ll be daily, weekly, monthly, semi-annually or annually.

Is my money safe?

Like traditional savings accounts, high-yield savings accounts are federally insured for up to $250,000 if you open an account at a Federal Deposit Insurance Corporation–insured financial institution like a traditional bank or online bank. If you go with a high-yield account at a credit union, your account will be insured for up to $250,000 through the National Credit Union Administration, or NCUA, the federal agency that regulates and insures financial products at credit unions.

How do I find the best high-yield savings accounts?

Shopping around for the right high-yield savings account is key. As we mentioned, some have minimum monthly balance requirements depending on the account. Some may also come with monthly maintenance or other associated fees, which can quickly add up. Make sure you read all the fine print.

Some accounts, for example, require you to maintain a minimum balance that would earn you at least one cent each month based on the Annual Percentage Yield (APY). Other accounts offer a competitive rate when you deposit at least $10,000 and maintain this balance for as long as the account is open.

With other banks, you may find that you don’t have to pay a monthly maintenance fee, but there may be other fees associated with the account, like fees for domestic wire transfers, overdrafts or returned deposit items.

When it comes to interest, the rate you’ll receive varies depending on interest rates set by the Federal Reserve that banks use to calculate the APY for savings and investment products. But if you shop around, you’ll generally be able to find traditional brick-and-mortar banks, online banks and credit unions that offer high-yield savings accounts with an APY of about 0.5%, though some higher rates may be available.

Alternatives to high-yield savings accounts

A high-yield savings account might not work for everyone. If you want to put some money toward savings but a high-yield savings account doesn’t feel right for you, here are a couple of alternatives you could consider.

  • Money market account: This type of savings account may earn more interest than a traditional savings account. Like a checking account, it offers access to your money through checks and a debit card. The downside is that you may earn less interest than with a high-yield savings account, and you may have monthly minimum balance requirements or a monthly fee.
  • Certificate of Deposit: CDs may have higher interest rates than a high-yield savings account. But you usually have to leave your money in the CD for an extended period of time to earn the highest interest rates. And you may face withdrawal penalties if you take any money out of the account early.

How much should I be saving?

Your financial situation is unique, but the general rule of thumb is to have at least three to six months’ worth of your total monthly budget saved in cash. A good starting place for saving is to create an emergency fund, which can help in case of unforeseen events like a job loss or major home or car repair.

Without savings, you might be tempted to turn to credit cards to pay for day-to-day expenses. But this could end up being expensive if you can’t pay in full each month and can be damaging to your credit scores as your utilization rises.


Next steps

If you want easy access to your savings relatively quickly while still earning a good return, a high-yield savings account may be a good middle ground. But before you sign up for one, do your research to find the highest rates and best terms for your situation.

Find out the interest rate, fees, required initial deposit, monthly balance requirements, and whether there’s a monthly withdrawal or transaction limit or any minimum deposits required. Also consider banks or online savings accounts that are FDIC insured so your money is protected. And think about choosing an account that offers convenient services like online banking, a mobile app and the ability to easily transfer funds.


About the author: Satta Sarmah Hightower is a writer, editor and content marketing manager with a decade of experience in the media industry. Her writing focuses on healthcare, personal finance and techno… Read more.