What is a High Yield Savings Account and How Does it Work?

What Is A High-Yield Savings Account?

A high-yield savings account — sometimes called a high-interest savings account — is a type of savings account that pays higher-than-average interest rates on deposits. The interest rates on these accounts can be ten times higher than the national average for a regular savings account^[1].

Banks advertise savings accounts by their annual percentage yields (APYs). The APY is the rate of return you'll receive for your deposited funds over one year, including compound interest.

There are other reasons for choosing a high-yield savings account. For one thing, these accounts are very safe. While you can earn a better rate of return by investing in the stock market, annual profits from stocks are not guaranteed. In an unlucky, volatile year, you could lose money.

By comparison, savings accounts lack that volatility and risk. The Federal Deposit Insurance Corporation (FDIC) insures deposit accounts up to $250,000 per depositor per insured bank^[2]. So even if the financial institution fails, you're protected.

In addition, account holders can easily access the funds in their high-yield savings accounts. That makes them a more convenient choice for short-term savers than certificates of deposit (CDs), where your money is locked in for a set term.

High-yield savings accounts are relatively new to the banking world. In recent years, financial institutions have increasingly focused on online banking. Some banks exist entirely online. Because online-only banks lack the overhead costs of brick-and-mortar branches, they've been able to offer higher interest yields. But some traditional banks have started offering high-interest accounts, giving you the best of both worlds: the high APYs and convenience of online banks plus the personal service you'd expect from a neighborhood branch.

How Do High-Yield Savings Accounts Work?

It's relatively easy to open a high-yield savings account, especially if you already have a checking account at a bank that offers one. Depending on the financial institution, you can open an account at a bank branch or online. Be prepared to provide your contact information, Social Security number, and at least one form of government identification (such as a driver's license or passport). If you're opening a joint account, the other account holders must also provide this information.

However, when opening a high-interest savings account, you'll probably also want to make a deposit right away. You can do this by depositing cash or checks, by transferring money from another account.

Keep in mind that some high-yield savings accounts require a minimum initial deposit to open. You may also need to keep a minimum balance in the account. Failure to do so could lead to monthly fees or the closure of the account.

Once you've opened an account, you can start depositing and withdrawing funds. Withdrawing is easy — you can do so by transferring funds to a linked checking account or even using an ATM. However, many banks limit the number of free withdrawals you can make from these accounts.

Upsides Of A High-Yield Savings Account

There are many benefits to opening a high-yield savings account. These include:

•  Higher interest rates. High-yield savings accounts can offer significantly higher APYs than traditional checking or savings accounts.
•  Easy withdrawals. Unlike CDs, savings accounts have no maturity dates that you must wait for in order to withdraw money without penalty. That makes high-yield savings accounts a great choice for short- or medium-term savings goals such as funding a dream vacation, making a down payment on a house, or maintaining an emergency fund.
• Safer than stocks. It's easy to lose all your money on an unlucky stock-market investment. This isn't the case with high-yield savings accounts, most of which are insured by the FDIC.
• Compound interest. These accounts typically compound interest daily, meaning your funds can quickly grow.

Downsides Of A High-Yield Savings Account

There are some downsides to opening a high-yield savings account, including:

• APYs are variable. High-yield savings accounts pay interest rates that can fluctuate. Your yield may decrease in the future.
• Limited withdrawals. Many banks limit the monthly withdrawals you can make (usually six). If you need constant, immediate access to funds, a checking account may be a better choice — although you won't earn much, if any, interest.
• Stricter standards. Some high-yield savings accounts require minimum deposits or balances. Banks may charge fees or close accounts that don't meet these requirements.

High-Yield Savings Accounts vs. Other Account Types

High-yield savings accounts aren't the only savings instruments on a bank's menu. Here, we compare high-interest accounts to some of the most popular alternatives.

High-Yield Savings Account vs. Regular Savings Account

There's one major difference here: the yield. Many high-yield savings accounts can offer ten times the APY of a traditional savings account. Some accounts offer even more.

However, some banks have stricter requirements for opening and maintaining a high- interest account. For example, you may need to deposit a certain amount of money when you open the account or maintain a certain minimum monthly balance.

High-Yield Savings Account vs. Certificate of Deposit (CD)

Certificates of deposit typically offer higher interest rates than high-yield savings accounts. Plus, these rates are usually fixed, unlike variable-rate high-yield savings accounts.

However, when you open a CD, you deposit a lump sum in the account that you agree not to touch for a fixed term. You withdraw the funds without penalty only once the CD reaches maturity.

With a high-yield savings account, you can deposit money into the account and withdraw it when you need it. Therefore, they're a better pick for those who appreciate flexibility.

High-Yield Savings Account vs. Money Market Account

Like high-yield savings accounts, money market accounts are interest-bearing deposit accounts insured by the FDIC. They also allow easy access to funds — sometimes your bank will send you a set of checks when you open one of these accounts.

However, they often offer lower interest rates than high-yield savings accounts.

High-Yield Savings Account vs. Checking Account

Both high-yield savings and checking accounts offer relatively easy access to your money. But there's a big difference: Most checking accounts do not earn interest. And when they do, it's usually at a rate lower than even traditional savings accounts. Many people have a checking account for everyday expenditures and a savings account for letting money grow in the short to medium term.

How To Choose A High-Yield Savings Account

When comparing high-yield savings accounts, there are several important considerations:

• APYs. You're opening this account to earn money, so first look for the highest interest yield. Read the terms: Does the account require you to maintain a minimum balance to earn the advertised APY? Is it only a temporary promotional APY set to expire?
• Availability. Not all high-yield savings accounts are available in all areas. Always check to see if you're eligible for an account.
• Fees. Some banks charge fees for maintaining an account. Certain fees are calculated into the APY to aid consumer comparison. Does the bank waive the fees if you maintain a certain minimum balance?
• Required deposits. Some high-yield accounts require minimum initial deposits to open. Does this impact your choice?
• Withdrawal rules. Many banks allow account holders to make only six monthly withdrawals from their savings account for free. After that, charges may apply, or the bank may even close the account.

When Should You Open A High-Yield Savings Account?

High-interest savings accounts can be great tools for building wealth. But there are some scenarios in which opening a high-yield savings account makes sense. Here's when you should seriously consider one of these accounts:

• When you need an emergency fund. Many personal finance experts advocate having at least three to six months' worth of income saved for a rainy day. With a high-yield savings account, you'll reach that financial goal quicker than with a traditional savings or checking account. And because you can easily withdraw your funds from this type of account, you'll be able to access your money when it's needed most.
• When you can't stomach stock-market risk. High-yield savings accounts may not yield as much annually as the stock market, but they're safer. When markets are volatile, they can protect your nest egg from risk while still letting it grow. This is especially true if you're nearing retirement age and don't want to risk any last-minute losses.
• When you're saving for a short-term goal. Trying to build up a down payment? Planning on taking a big trip next summer? Because high-yield savings accounts are safer than stocks and can help you grow your money faster than traditional accounts, they're ideal for short-term savers.

Is A High-Yield Savings Account A Good Idea?

Depending on your needs and financial situation, opening and maintaining a high-yield savings account may be a great idea. These accounts can safely and surely grow your emergency fund or nest egg. But these high-interest accounts aren't for everybody. If you think you'll need to access your money frequently and quickly, you may be better off with a checking account. On the flip side, if you want to grow your wealth long-term and don't mind risk, carefully investing in stocks can provide better gains.

As with any personal finance decision, it's best to do the due diligence, read the fine print, and carefully consider all the options. Only then should you decide whether a high-yield savings account is right for you.