What Is a High-Yield Savings Account?May 16, 2022
While a savings account can be a safe place to set aside money for a rainy day, traditional savings accounts typically offer a very low APY, meaning you generally won’t earn much interest on your balance. According to the FDIC, the average annual percentage yield (APY) for a traditional savings account is just 0.06%.
However, high-interest savings accounts may offer APYs up to 15-20 times higher than what you’d get with a traditional savings account, which means you’ll earn more interest on your deposits. If you’re wondering how high yield savings accounts work, here’s what you need to know.
What Is a High-Yield Savings Account?
High-yield savings accounts are deposit accounts that offer a relatively high APY compared to traditional savings accounts. Many banks and credit unions offer these accounts, and APYs can be as high as 0.80%, or even 1.00% in certain cases. And like a traditional savings account, deposits you make in a high-interest savings account are insured up to $250,000 by the FDIC or NCUA, as long as the bank or credit union offers this coverage.
Unlike a certificate of deposit (CD) account, which typically requires that you deposit your money for a set period in order to earn a higher APY, high-yield savings accounts don’t come with a set deposit period. However, certain accounts may require that you deposit a specific amount or maintain a minimum balance to earn the highest APY available, though this isn’t always the case.
Traditional vs. High-Interest Savings Accounts Compared
If you’re thinking about moving your money from a traditional savings account to a high-yield savings account, here’s how a higher APY could impact your balance over time. For this example, we’ll assume our account holder has a $10,000 balance, and interest is compounding annually.
|Balance after 2 years||Balance after 5 years||Balance after 10 years|
|Traditional savings account
|High-yield savings account
While the APYs might not seem much different, they have a significant impact on the accountholder’s balance over time.
How to Choose a High-Yield Savings Account
While it can be tempting to choose the savings account with the highest APY, it’s good to consider additional factors before you open an account, including:
1. Brick and mortar or online
Some people enjoy the convenience of visiting a local banking branch in person, while others prefer to do their banking exclusively online or via mobile. As you shop around for different accounts, consider your preferences to determine which options are best for you.
2. Minimum balance requirements
As mentioned, certain high-interest savings accounts may require a minimum balance in order to get the highest APY available. For instance, you may need to deposit $5,000 in order to access a 0.75% APY, while those with a lower balance may only get a 0.05% APY. Ensure you research minimum balance requirements as you’re comparing different accounts.
3. Monthly fees
Some banks and credit unions may charge monthly maintenance fees or other fees to account holders. Determine whether or not the accounts you’re comparing have fees associated with them, as these fees are an extra cost to consider.
4. Compounding frequency
In the example above, interest was compounded annually on our account holder’s $10,000 balance. But different financial institutions may handle this differently. For instance, one bank might compound interest quarterly, while another might compound interest daily. The more frequently interest is compounded, the more you can earn from your deposits.
The Top Benefits of High-Yield Savings Accounts
High-yield savings accounts offer some benefits compared to other deposit accounts:
1. Higher APY than traditional savings accounts
As mentioned, traditional savings accounts typically offer an APY of around 0.06%, but high-yield savings accounts can offer APYs of around 1.00%. A higher APY means that you’ll earn more on your deposits.
2. Money is easily accessible
Unlike a CD account, which may require that you deposit money for a set time period to earn a higher APY, high-yield savings accounts don’t have this requirement. When you deposit your money in a high-interest savings account, you can generally access it whenever you want or transfer it to your checking account if needed. This can come in handy if you want to earn more interest but still need quick access to your money to cover rent and college expenses.
3. Deposits are insured
Deposits up to $250,000 made in high-yield savings accounts are typically insured by the FDIC or NCUA. This insurance offers some peace of mind that your money will stay safe even if your financial institution is struggling.
The Bottom Line
Putting your money into a high-yield savings account can be a smart move. To choose the best account, research APYs, whether a bank or credit union offers in-person or online banking, minimum balance requirements, monthly account fees, and how often interest is compounded. Understanding these factors will help you find the right account for you.