What to know about high-yield savings accounts
What is a high-yield savings account?
High-yield savings accounts typically pay a much higher annual percentage yield (APY) than traditional savings accounts, providing savers the ability to earn more on their savings while still enjoying the security of a federally insured account. Traditional savings accounts are offered at some brick-and-mortar banks and larger banks. These accounts tend to yield close to nothing, often around 0.01 percent APY. High-yield savings accounts can yield 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 fixed yield should consider a certificate of deposit, and a no-penalty CD might be a good option for those looking for 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 0.23 percent. But that’s just the average. There are savings accounts earning even less yield 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 earns interest. Then the interest, which is typically credited on a monthly or quarterly basis, begins to earn interest. That’s compound interest, and it’s how your money starts to really grow over time.
What to look for in a high-yield savings account
Here are a few important things to consider when searching for a high-yield savings account. Also take a look at Bankrate’s expert reviews of popular banks that offer high-interest savings accounts when choosing which account is right for you.
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: the interest earned on your initial deposit in addition to the interest earned on top of other interest earnings. When it comes to APYs, higher is usually better, but it’s important to weigh the APY against the requirements to earn the yield.
You can use Bankrate’s compound interest calculator to calculate your potential earnings on any savings account.
Minimum deposit required
Minimum deposit amounts vary by bank — some require nothing to open an account, while others require $10,000 or more. Decide how much you can realistically invest 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 minimum deposit requirements at all institutions you’re considering before opening an account. Online banks, for example, often require no minimum opening deposit or no minimum balance, and may also come without any monthly maintenance fees.
Minimum balance required
Not only do some high-yield savings accounts require a minimum deposit to open an account, they may also have a minimum balance required to earn the APY offered or 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 access the money, and whether you’ll be able to maintain the balance to earn the APY.
Monthly maintenance fees
The main fee to look out for with savings accounts is monthly service fees. These are fees that a bank may charge you 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 interest rates based on the Federal Reserve’s rate decisions.
Unlike CDs, which lock in a rate for a period of time, savings account yields tend to be variable, which means they could change at any time.
A bank may lower or raise savings account APYs for various reasons. It may raise 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 stash cash for emergencies, large expenses and short-term savings goals while earning interest. The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category. This 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 good options for nearly any person. Different people are going to have different financial goals and be at different stages in their financial life. Here are a few examples:
A high-yield savings account is a great way to have your down payment money growing until you need it to buy a house, condo or apartment. And unlike most CDs, you can add to your balance at any time.
Soon-to-be married couples
A high-yield savings account allows you to earn a competitive yield on your balance as you save for your wedding. You can keep adding to this account all the way up until you say “I do.” Having a separate account while saving for your wedding can help you more easily monitor your progress to make sure you meet your savings goals for the big day.
Jetsetters and road-trippers
Determine how much you’ll need for your next vacation. And then open a savings account to achieve your saving goals.
A savings account allows you to earn compound interest with the ability to add to this account throughout the year. You might want to also set up a split deposit from your direct deposit into this savings account. Or you can set up an automatic transfer from your checking account –– or other savings account –– into this account to make sure your savings goals stay on track. (Just make sure you’ll always have enough in this other account so you don’t incur overdraft fees.)