What is a high-yield savings account?

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Making your money work for you is more important than ever. If you're keeping your savings in a traditional bank account, you might be missing out on significant growth opportunities.

You don’t have to settle for a meager return. High-yield savings accounts pay much higher rates, and many come with low balance requirements and fees. While online banks mainly offer these accounts, some brick-and-mortar banks have hopped on the bandwagon. 

What is a high-yield savings account?

A high-yield savings account is designed to help your money grow faster than a traditional savings account. It offers a higher interest rate, allowing you to earn more on your money while keeping it safe and accessible.

Think of it as a turbo-charged version of a regular savings account. While traditional accounts might offer interest rates as low as 0.01%, the top high-yield accounts can offer rates of 5% or higher. 

“When interest rates are high, the disparity between high-yield savings accounts and what everyone else is paying is very significant,” says Greg McBride, chief financial analyst at Red Ventures. “As a saver, you can get a higher return while still getting federal deposit insurance to keep your money safe and enjoy convenient access to the funds.”

Both banks and credit unions offer high-yield savings accounts. But, you'll find most high-yield accounts at online banks. By operating primarily online, these institutions can reduce overhead costs and pass those savings on to customers through higher interest rates.

How do high-yield savings accounts work? 

High-yield savings accounts work like regular ones, but there are a few key differences. The main one is the interest rate.

High-yield savings accounts also often have fewer fees than traditional savings accounts. Many have no monthly maintenance fees and low or no minimum balance requirements.

Interest in a high-yield account often compounds daily or monthly. This means that interest earnings are added to your principal balance, and you earn interest on the combined amount. This compounding effect can help your money grow even faster over time.

To see how this works in practice, let's say you have $10,000 to save. If you put that money in a traditional savings account with a 0.01% APY, you'll earn a mere $1 in interest after one year. However, if you choose a high-yield savings account with a 5% APY, you'll earn $500 in interest over the same period. 

Let's compare the growth of $10,000 over five years, assuming the interest rates remain constant:

The interest rates on high-yield savings accounts are typically variable, meaning they can change over time. These rates often fluctuate based on the federal funds rate set by the Federal Reserve.

Who should consider a high-yield savings account? 

These accounts are particularly beneficial for:

1. Emergency fund savers
2. Goal-oriented savers (ex., saving for a down payment or vacation)
3. Conservative investors looking for low-risk growth
4. Anyone dissatisfied with the interest rates on their current savings account

High-yield savings accounts vs. regular savings accounts

Here’s a breakdown of the key differences between high-yield savings accounts and regular savings accounts.

Pros and cons of high-yield savings accounts

Like any financial product, high-yield savings accounts have their advantages and disadvantages:

How to choose the best high-yield savings account 

When selecting a high-yield savings account, consider the following factors:

1. Interest rate (APY): This should be at the top of your list, as the APY determines how much interest you'll earn. Look for the highest APY, but be aware that rates can change over time. Some banks offer promotional rates that may decrease after an introductory period.
2. Fees: Look for an account with low or no fees, such as monthly maintenance fees, transfer fees, or withdrawal fees. 
3. Minimum balance requirements: Some accounts require a minimum balance to earn the advertised APY or avoid fees. Choose an account with a minimum balance that aligns with your goals and budget.
4. Accessibility: Consider how easy it is to access your money. Look for features like free ACH transfers, mobile check deposit, ATM access, and direct deposit capabilities. 
5. FDIC or NCUA insurance:  Always make sure the account is FDIC-insured (for banks) or NCUA-insured (for credit unions) to protect your deposits up to $250,000.
6. Digital experience: Since most high-yield accounts are online-only, user-friendly digital platforms and mobile apps are crucial. Also, check customer service options and hours of availability.
7. Added features: Some accounts offer extra perks like automatic savings tools, goal-setting features, and integration with budgeting apps.
8. Consider account linking options: If you prefer to do all your banking in one place, check if the high-yield account can be linked with a checking account.
9. Understand the fine print: Read the account's terms and conditions carefully. Pay attention to details like how interest is calculated and paid, any limits on withdrawals, and policies on rate changes.

Top high-yield savings accounts for 2024

Here's a comparison of some of the top high-yield savings accounts available as of August 2024. Remember that rates are variable and subject to change, so always verify the current rates before opening an account.

Maximizing your high-yield savings account 

Once you've opened your high-yield savings account, there are several strategies you can employ to make the most of it:

• Set up automatic transfers: Schedule regular transfers from your checking account to your savings account. This "pay yourself first" approach ensures consistent savings. If your employer offers direct deposit, consider having a portion of your paycheck deposited into your account.
• Save windfalls: When you receive unexpected money (tax refunds, bonuses, gifts), consider depositing at least a portion into your account.
• Set specific goals: “To maximize the potential of a high-yield savings account, it is crucial to have a financial plan and contribution targets regardless of how much money you make,” says Alyssa Schaefer, chief experience officer at Laurel Road. “You can begin by creating a budget with attainable milestones, fostering a sense of accomplishment once these are achieved.” 
• Monitor your interest rate: Keep an eye on your account's APY and compare it to other options in the market. “As a saver, you’re not stuck,” says McBride. “You can move your money elsewhere if your account no longer offers a competitive rate.”

Frequently asked questions about high-yield savings accounts

The bottom line

High-yield savings accounts are a powerful way to make your money work harder. With higher interest rates than traditional savings accounts, they can help you reach your financial goals faster.

By understanding how these accounts work and how to maximize their benefits, you can take steps toward improving your finances. Remember to review your account's performance and compare it with other options to ensure you always get the best savings return.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.