What Is a High-Yield Savings Account?

What Is a High-Yield Savings Account?

A high-yield savings account is an account at a bank or credit union that pays customers a higher annual percentage yield (APY) than a traditional savings account. In February 2023, the average APY on savings accounts was just 0.35%, according to the Federal Deposit Insurance Corporation (FDIC). Meanwhile, some high-yield savings accounts offer annual returns of well above 3% at this writing.

To give you an idea of what that could mean to you, let's say you have $5,000 in a traditional savings account that offers a 0.33% APY. If you made no other contributions for a year, at the end of the year you would earn about $17 in interest. If, instead, you move your $5,000 to a high-yield savings account that earns 3% interest, you will earn a little over $150 in interest in one year.

High APYs aren't the only reason to consider high-yield savings accounts, as rates are variable and can go up or down based on the benchmark interest rate set by the Federal Reserve. Like other savings accounts, high-yield accounts are safe, low-risk places to keep your money. It's also important to consider minimum deposit and minimum balance requirements, monthly account fees, transfer options and more when determining whether a high-yield savings account is the best place for your money.

Pros and Cons of High-Yield Savings Accounts

High-yield savings accounts offer a solid place to stash your money. Although there are plenty of upsides to high-yield savings accounts, there are a few downsides to also keep in mind.

Advantages of High-Yield Savings Accounts

A few of the advantages of high-yield savings accounts include:

• Higher interest: Probably the single best reason to put your money into a high-yield savings account instead of a traditional savings account is to earn a better return on your money.
• Compounding interest: Depending on your account, high-yield savings accounts compound interest daily, monthly, quarterly or annually. That means you earn interest on the interest earned up to that point. Keep in mind that the more often interest compounds, the faster the growth.
• Your money is insured: Money in a high-yield savings account at an FDIC-insured bank is safe—up to at least $250,000—if something were to happen, like the bank failing. If your money is in a federally insured credit union, it is protected by the National Credit Union Share Insurance Fund up to at least $250,000 per individual account holder.
• Fewer fees: The best high-yield savings accounts come with few or no fees and low or no minimum deposits and minimum balance requirements.
• Easy accessibility: Money in your high-yield savings account is available to you whenever you need it (possibly up to a limit depending on the financial institution). That's one reason these accounts are a solid option for your emergency fund. And, because many banks and credit unions allow you to manage your money online or through a banking app, transferring money between accounts or making a deposit or withdrawal is usually fast and easy.

Disadvantages of High-Yield Savings Accounts

Along with the many advantages, there are also a few disadvantages to consider.

• Fluctuating interest rates: Interest earned on high-yield savings accounts is variable, meaning your current rate may not last forever and can go either up or down.
• Limited withdrawals: Although your savings are easily accessible, your bank may restrict how many transactions you can make per month. If you withdraw money too often, your bank may even close your account.
• Limited access: Many of the top high-yield savings accounts are at online-only banks. With these banks, you may have limited access to ATMs and may be required to use an ATM that's part of their network, which may be located across town.
• Inflation: Although the APY on high-yield accounts is typically higher than with traditional savings accounts, inflation can still outpace the interest you earn. If the inflation rate exceeds the APY tied to your accounts, your funds could lose value over time.
• Few physical branches: Not all physical banks offer high-yield savings accounts and if they do, the rates may not top many online banks. So if you prefer walking into your bank and the face-to-face interaction with a banker, you might miss out on the highest APYs.
• Better places to build retirement savings: While interest rates on high-yield savings accounts are enticing, they likely won't outpace the long-term gains of the stock market, which has seen average annual growth of around 7% per year over time. If you have decades to go until retirement, other investment options may help you build a bigger nest egg.

How to Open a High-Yield Savings Account

Opening a high-yield savings account isn't much different than opening a regular savings account. However, to get the best rate, consider looking into an online bank. Shopping around for an account that offers the best rates and meets your needs makes good sense. Here's how to open a high-yield savings account.

1. Compare banks and rates. If your goal is to get the highest return on your savings while keeping your cash liquid, a high-yield savings account might be a good solution. Compare both physical banks and credit unions as well as online accounts. If you're lucky enough to currently bank at an institution that offers high APYs, then your best choice may be to stay put. Just be sure to find out whether your bank's high-yield account option charges fees or has minimum deposit requirements.
2. Fill out the application. Once you've decided on a bank, credit union or online bank, it's time to fill out the application. You'll usually need some or all of the following:
   • Contact information, including name, address, email address and phone number.
   • Driver's license, passport or other government-issued ID.
   • Another form of identification, such as a Social Security number or an Individual Taxpayer Identification Number (ITIN), a bill with your name on it or your birth certificate.
3. Deposit money into your account. Some institutions require you to fund your account right away, while others may let you open your account and deposit funds later. If you choose to transfer the funds from another account, you may need to provide account details like the institution's routing and account numbers.
4. Enroll in online banking. If you want to take advantage of banking on the go, you may want to download the bank's app and enroll in online banking. Once you set up an online account, you'll want to choose a username and password. Keep this information in a safe place that you can easily access if necessary. Also, don't share this information with anyone unless you've opened the account jointly with another person.
5. Choose a beneficiary. Sometimes when opening your account, you may be asked to provide a beneficiary on the account who would inherit the money if something were to happen to you. This may be a step that comes later and can be anyone, such as a spouse or child, you choose.
6. Understand the account's requirements. Look at fees, minimum deposits and withdrawal rules and set up automatic transfers, link an account or select e-statements to potentially save money.

Can You Lose Money in a High-Yield Savings Account?

If you stay within federal deposit guidelines, you won't lose money in your high-yield savings account—but your account could lose value depending on the inflation rate.

For years, regular savings accounts have offered low interest rates. In fact, in March 2021, the average interest rate on a traditional savings account was only 0.04%. But even today, the most generous rates from high-yield savings accounts have fallen short when compared with rising prices and inflation. For the 12 months ending February 2023, for example, the annual inflation rate was 6%, according to the U.S. Labor Department data.

Still, with many high-yield accounts offering 3% to 4% APYs, they may provide the best opportunity for returns if you are saving to reach a short-term goal or need to keep a certain amount of cash liquid. And, as long as your deposits don't top $250,000 per person on your account, you can rest assured that it is insured and you won't lose the money you've stashed there.

Alternatives to High-Yield Savings Accounts

High-yield savings accounts offer a way to save and earn higher interest than with standard savings accounts. However, they are not for everyone. If you're uncertain they will meet your needs, check out these alternative ways to save.

Money Market Accounts

Like high-yield savings accounts, money market accounts may offer higher interest rates than standard savings accounts. Although your returns may not be as great over time as with some investments, like those in the stock market, money market accounts are safer. Keep in mind that many money market accounts require a minimum deposit and you may have to keep a minimum balance in your account. Plus, your financial institution may limit the number of transactions you make each month.

Certificates of Deposit (CDs)

Certificates of deposit (CDs) are also a type of savings account offered by many banks and credit unions. These accounts require you to keep your money in the account until it reaches a maturity date. If you withdraw the funds prior to that maturity date, you may be penalized. Like high-yield savings accounts, CDs are insured by the FDIC or the NCUA up to $250,000 per account holder.

Health Savings Accounts (HSAs)

Health savings accounts let you set aside pretax money to pay for qualified medical expenses. Because medical bills can be expensive, having money set aside can be a lifesaver when you need it.

Savings Bonds

There are two types of savings bonds—EE bonds and I bonds. Both have benefits for saving long term. EE bonds are guaranteed to double in value in 20 years, they earn a fixed interest rate and allow you to purchase up to $10,000 in bonds each calendar year. I bonds earn both a fixed interest rate and a rate based on inflation. The rate is reset twice a year. The maximum you can purchase in one calendar year is $10,000 in electronic I bonds plus $5,000 in paper I bonds. You can cash in your EE or I bonds after one year, but if you cash them in before five years, you'll lose three months of interest.

High Five on Saving

Saving is a safety net for life's uncertainties. And a high-yield savings account can help you feel confident that you are earning a solid return on your cash, especially compared with traditional savings accounts. A high-yield savings account can provide money for a medical procedure not covered by your insurance, cover a temporary job loss, pay for another financial emergency or simply offer a good place to save up for a down payment or other savings goal.