Table Of Content
What Is A High-Yield Savings Account?
If you’re looking for a safe option to hold your emergency fund or other savings, you may have considered a high yield savings account.
In simple terms, high-yield savings accounts are a form of savings account that typically pay up to 25 times the national standard savings account rates.
So, if the average standard savings rate is 0.1%, you may earn 2% or more with a high-yield savings account. Traditionally, bank customers may have held a savings account along with their checking account to make transfers quicker and easier.
Usually, High Yield Accounts Are Online Only
However, with the development of internet-only financial institutions along with traditional banks offering online accounts, the competition in the savings account niche has skyrocketed, prompting the category of the high-yield savings account.
Since there is such a vast difference in the rates offered with high-yield savings accounts and the national average, there is significant potential for increased earnings.
Other than a higher rate, there is little difference between a high-yield savings account and a standard savings account.
You can still deposit funds into the account and make withdrawals, but some banks do charge a fee if you make more than a set number of withdrawals from the account in any given month.
How Do High Yield Savings Accounts Work?
A high-yield savings account works in a very similar way to standard savings accounts. You can deposit funds into the account and start earning interest. However, how you earn interest can be a little different.
High-yield savings accounts typically offer compound interest, which can help your savings to grow more quickly. Essentially, this means that you earn interest on the principal balance and the interest earned.
Most high-yield savings accounts have interest that compounds daily, so each day you’re earning more and more on your initial deposit amount. With a standard savings account, you may only have interest compounded monthly. So, in addition to earning a lower rate, you will have the interest compounded far less frequently.
Once the funds are in your savings account, you can still make withdrawals or transfer money out of the account. This means that if you’re using the account for your emergency fund and an unexpected bill comes in, you can use the money in the account to cover the expense.
However, the terms and conditions of your account are likely to stipulate a maximum number of withdrawals that you can make in a calendar month. In most cases, this is six, but some accounts allow nine.
How Much Does a High Yield Savings Account Earn?
As we touched on earlier, in order to be classified as a high yield savings account, the account must pay a significantly higher rate compared to the average standard rate. So, if the standard savings rate is 0.2%, you may find high yield savings accounts that offer up to 4% or even higher.
To calculate the difference in earnings potential, let’s assume that you have $1,000 to deposit in your account. This means that over one year, you would only earn just $2 in interest with a standard savings account. However, if you put the same $1,000 into a high yield savings account you could earn $40 in interest over the same year.
Benefits and Drawbacks of HIgh Yield Savings Accounts
Opening a savings account during inflation can be a good idea to protect your money.
However, no financial product is perfect and ideally suited for all financial circumstances, so it is important to be aware of both the benefits and potential drawbacks of this type of account.
Pros | Cons |
|---|---|
Higher Rate of Return | Account Minimums |
Minimal Fees | Withdrawal Restrictions |
FDIC Insurance | Lack of Branch Support
|
Daily Compound Interest
|
- Higher Rate of Return
The most obvious benefit is that you can access a higher interest rate compared to standard savings accounts.
- Minimal Fees
Although not exclusively an online offering, high yield savings accounts are typically offered as an online account, which means that they typically have minimal fees.
- FDIC Insurance
Since high yield savings accounts are only available via established financial institutions, they typically are insured against bank failure via FDIC federal insurance.
- Daily Compound Interest
Most high yield savings accounts offer interest that compounds daily for even better returns.
- Account Minimums
Many financial institutions require a minimum deposit to open a high yield savings account and you may need to maintain this account balance to qualify for the higher interest rates.
- Withdrawal Restrictions
You’ll need to check the terms and conditions for the specific account, but you are likely to be limited to a maximum of six withdrawals in any calendar month.
This includes ATM withdrawals, electronic transfers and all other withdrawal methods. If you exceed this maximum, you may incur an interest penalty or in some instances, your account may revert to a standard savings account.
- Lack of Branch Support
Since many high yield savings accounts are online only, you may not be able to access branch support if you have any queries or questions.
Where Can You Open a High Yield Savings Account?
There are several types of financial institutions that offer high yields savings accounts including:
- Online Banks: With their lower overhead costs, since they don’t need to maintain a branch network, online banks tend to offer more attractive rates and terms, including high-yield savings accounts. You may need to deposit a minimum amount and cash deposits may not be possible.
- Credit Unions: Since credit unions don’t need to answer to shareholders and instead work for the benefit of their members, they tend to offer some of the best rates in the marketplace. This makes your local credit union a good place to start in your search for a high-yield savings account.
- Traditional Banks: Although high-yield savings accounts were initially the remit of online banks, more and more traditional banks have followed suit to compete. This means that you may be able to find good high-yield savings account with your existing bank.
Online Bank | Traditional Bank | Credit Union |
|---|---|---|
You want lower fees | Variety of account options | Join as a member |
Communicate Online | Cash deposit is available | Less fees |
High rates on savings account | Personal service | Limited options |
How to Compare High Yield Savings Accounts
Since many different financial institutions are now offering high-yield savings accounts, there are plenty of options to choose from. When comparing high-yield accounts, there are several factors to consider. These include:
- The Initial Deposit: The first thing you should look at is how much you’ll need to deposit to open your new account. Ideally, you should be able to open the account with no minimum deposit, so you can fund it later. However, you may be comfortable with an account that just requires a small initial deposit.
- The Minimum Balance: You should also take a note of if there are any minimum balance requirements to qualify for the stated APY. Some banks tie the rates to your balance, while others offer the same rate regardless of your balance. You don’t want to miss out on getting a higher rate if your balance drops a dollar or two below the qualification level.
- Fees: While many banks are reviewing their fee policies, it is still important to check if your new account will incur fees that could eat away at the interest your savings accrues. Check the terms and conditions of the account for any monthly maintenance fees or other charges that may be applied to your account.
- The Compounding Frequency: The more often the interest compounds, the more your deposits will grow over time. Interest can compound monthly, weekly or daily, so look for an account that offers daily compounding to maximize your returns.
- The Rate: Finally, be sure to compare rates. Not all high yield savings accounts will offer the same rates and they can vary significantly depending on the specific financial institution.
Bank/Institution | Savings APY |
|---|---|
American Express | 4.25% |
Capital One | 4.25% |
Upgrade | 4.69% |
Marcus | 4.40% |
Discover Bank |
4.25%
|
Lending Club | 5.00% |
Quontic | 4.50% |
UFB Direct | Up to 5.15% |
Alliant Credit Union | 3.06% – 3.10% |
Ally Bank | 4.20% |
SoFi | up to 4.50% |
How to Open a High Yield Savings Account
Fortunately, opening a high-yield savings account is quite easy and the process is similar to opening a regular savings account. You can accomplish opening an account in a few simple steps:
- Select the Appropriate Account: Once you’ve compared the high-yield savings account options and chosen the one that best fits your needs, you can start the account opening process. Visit the official financial institution for the account and find the product page. You should find a button or link to apply.
- Provide Proof of ID: To support your account application, you’ll be required to provide a copy of a government issued photo ID. Depending on the specific bank or credit union, you may need to upload this as part of the application or send it as a follow up. Your bank will provide specific instructions to complete this. Appropriate photo IDs include a valid driver’s license or a passport.
- Complete the Application Form: As with other types of bank accounts, you’ll need to complete the application form with your personal information including your name, email address, address, contact phone number, date of birth and Social Security Number.
- Fund Your Account: The final step of the process is to fund your new account. If the account has a minimum deposit requirement, you are likely to be prompted to link a bank account or make a transfer as part of the application. Otherwise, you’ll need to wait until you have an account number and routing number, so you can schedule a transfer.
Are High Yield Savings Accounts Safe?
Yes, high-yield savings accounts are offered by banks and credit unions, so they have federal insurance that provides coverage of up to $250,000 per depositor.
Bank accounts have FDIC (Federal Deposit Insurance Corp) cover, while credit unions have insurance from the National Credit Union Administration. This means that should the financial institution fail, you will still be able to recover your account balance.
This means that high yield savings accounts are classified as a safe investment, as there is no risk to your capital. However, you won’t be able to access the potential returns offered by more risky types of investment.
Can You Close a High Yield Savings Account?
Yes, as with a standard savings account, you can close your high-yield savings account if you no longer require it. The specific account closure procedure will vary depending on the specific financial institution.
In most cases, you’ll need to file a closure request online or in writing. However, some banks may allow you to start the closure procedure by calling the customer support line or speaking to a member of staff in your local branch.
Before you close your account, you’ll need to think carefully about whether this is a good option for you. You will need to think about where you want to move any balance left in the savings account, but if your account does have fees, you will need to cover these with the remaining balance before the bank will close the account.
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High Yield Savings Account Alternatives
If you’re unsure if a high yield savings account is the right choice for you, you may want to consider the alternative options. These include:
-
Money Market Accounts
These are a type of deposit account that combines the features of a typical checking and savings account. You may earn interest as you would with a typical savings account, but you may also be able to make purchases using an associated debit card or write checks.
Whether a money market account is a better alternative for you will depend on how you intend to use the account. If you want the flexibility to access your funds at any time, and are willing to accept a lower rate, you may prefer a money market account.
-
CDs
If you're looking to protect your money from inflation, a high-yield savings account provides a good way to protect your money, but keep in mind your money still loses value as long as the inflation rate is higher than your annual yield.
However, in such a case there is another option to consider – gold. While there is no guarantee for an annual yield, it may preserve the value of your money better than high-yield savings, and even better than investing in CDs.
CDs, gold investing, and other inflation-proof investments may preserve the value of money better than other investment options.
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Government Bonds
Government bonds are similar to a CD in that you are tying your money up for a set period to access higher rates. However, as the name suggests, these bonds are backed by the U.S government, so they are considered one of the safest investment options.
The terms for government bonds can also be far longer than CDs and there is a secondary market if you need to release your funds before the maturity date.
Just be aware that the value of your bond can be impacted by the current economic climate, so if you do sell on the secondary market, you may not get the best price.
-
Bond ETFs
These are a type of ETF (Exchange traded fund), exclusively focused on bonds. This provides a passively managed investment option that adds liquidity to your investment portfolio.
-
Gold
If you're looking to protect your money from inflation, high-yield savings account provides a good way to protect your money, but keep in mind your money still loses value as long as the inflation rate is higher than your annual yield.
However, in such a case there is another option to consider – gold. While there is no guarantee for an annual yield, it may preserve the value of your money better than high-yield savings, and even better than investing in CDs.
CDs, gold investing, and other inflation-proof investments may preserve the value of money better than other investment options.
FAQs
Some high-yield saving accounts have a minimum deposit requirement, so you will need to fund the account with at least this figure.
The accounts don’t typically have a maximum amount, but bear in mind that there are other alternatives, so you may not want to put all of your available funds into this type of account.
Yes, but you may be restricted to a maximum number of withdrawals per calendar month.
Many accounts have interest that compounds daily, but the interest is applied to the account statement once a month.
The interest you earn on your high yield savings account is generally taxable.
Wells Fargo has a Platinum savings account, which pays a higher interest rate, but it is not technically a high-yield savings account.
No, Bank of America savings rates are quite low compared to other banks and not considered as high-yield savings accounts.
Since you are restricted to a maximum number of deposits per month, banks can use your savings funds to lend to other customers, charging a higher lending rate, and thereby making a profit
