What to know about high-yield savings accounts
What is a high-yield savings account?
High-yield savings accounts typically pay a much higher APY than traditional savings accounts, providing savers the ability to earn more on their money while still enjoying the security of a federally insured account. Traditional savings accounts are commonly offered at brick-and-mortar banks and larger banks. These accounts may yield close to nothing, often around 0.01 percent APY. High-yield savings accounts can earn hundreds of times more these days.
Most high-yield savings accounts have a variable APY, which means the yield is subject to change. Consumers looking for a guaranteed yield should consider a certificate of deposit (CD), and a no-penalty CD might be a good option for those who prefer both a fixed APY and access to their money without incurring a penalty.
How do high-yield savings accounts work?
High-yield savings accounts help you earn a higher yield than a typical savings account. The national average savings account APY is 0.25 percent. But that’s just the average. There are savings accounts earning even lower yields than that — some of which are offered by the large brick-and-mortar banks.
Once you put money in a high-yield savings account, it starts to earn interest. Then the interest, which is typically credited on a monthly or quarterly basis, begins to earn interest. That’s referred to as compound interest, and it’s how your money starts to really grow over time.
What to look for in a high-yield savings account
Below are a few important things to consider when searching for a high-yield savings account. When choosing which account is right for you, also take a look at Bankrate’s expert reviews of popular banks, many of which offer high-interest savings accounts.
Annual percentage yield (APY)
One of the most important considerations when choosing a high-yield savings account is the APY.
APY incorporates the effect of compounding. Simply stated, compound interest is the interest you earn on interest. You’ll earn interest on your initial deposit as well as on the interest that accumulates over time.
When it comes to APYs, higher is usually better, but it’s important to weigh the APY against any requirements to earn the yield, such as maintaining a minimum balance.
You can use Bankrate’s compound interest calculator to calculate your potential earnings on any savings account.
Minimum deposit required
Minimum deposit amount requirements vary by bank, with some banks requiring $0 to open an account while others require $10,000 or more. Decide how much you’re willing and able to deposit when comparing high-yield savings products. If you’re trying to hit a particular goal, consider how much you’re willing to save and over what period of time.
Accounts requiring a higher minimum deposit might not offer the best yields, so it pays to check such deposit requirements at all institutions you’re considering before opening an account. Online banks, for example, often require no minimum opening deposit and no minimum balance, and many don’t charge any monthly maintenance fees either.
Minimum balance required
Not only do some high-yield savings accounts require a minimum opening deposit, but they may also require a set minimum balance in order to earn the APY offered or to avoid fees.
What’s important to consider when weighing the minimum balance requirements of various high-interest savings accounts is how often you’ll need to withdraw funds and whether you’ll be able to maintain the required balance to earn the APY.
Monthly maintenance fees
The main fee to look out for when shopping around for a savings account is a monthly service fee. Some banks charge this fee if you go below a certain balance — or average daily balance — during a statement cycle.
How often do savings rates change?
Competitive banks and credit unions have a tendency to adjust their interest rates based on the Federal Reserve’s rate moves.
Unlike CD rates, which are locked for a set term, savings account yields tend to be variable, which means they could change at any time.
A bank may decide to lower or raise savings account APYs for various reasons. It may increase its rate as part of a promotion to attract more deposits, or it may adjust rates in response to broader economic factors, such as changes to monetary policy by the Federal Reserve.
Are online high-yield savings accounts safe?
High-yield savings accounts offer a safe place to earn interest on your money, as long as the funds are federally insured. The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category. Similarly, the National Credit Union Administration (NCUA) insures up to $250,000 per share owner, per insured credit union, for each account ownership category.
This federal insurance guarantees consumers that their money is safe in the event of a bank failure, as long as it’s within the limits and guidelines. You can confirm your bank is FDIC-insured by using the FDIC’s BankFind Suite. Meanwhile, if you bank at a credit union, make sure the institution is backed by NCUA insurance.
Who should get an online high-yield savings account?
High-yield savings accounts with no minimum opening deposit requirement, no minimum balance requirement and no monthly service fees can be a good choice for nearly anyone. People can have different money-related goals and be at different stages in their financial life and benefit from these accounts. Here are a few examples: