High Yield Saving Accounts: How They Work and Why You Need One
High-yield savings accounts are a great place to stash cash and have all but replaced traditional savings accounts for savvy investors. That’s because high-yield savings accounts carry the same FDIC insurance as traditional ones but pay interest rates as much as 10 times higher. Whether you’re building your emergency fund or have some other short-term savings goal, such as a down payment for a house, a high-yield savings account can be a great way to protect your money while earning you a decent interest rate. Here’s a look at the ins and outs of high-yield savings accounts, including how they operate, how they can pay such a high interest rate, and whether or not they might be appropriate for you.
What Is a High-Yield Savings Account?
A high-yield savings account, as the name suggests, is a savings account that pays an APY that’s much higher than the national average. Most online savings accounts are issued by online banks, or the mobile/electronic divisions of traditional banks, and they often have no account minimums or monthly fees. Due to the lower overhead that online/mobile banks have, they can afford to pay higher interest rates on their deposits.
How Does a High-Yield Savings Account Work?
High-yield savings accounts work in a way similar to how standard savings accounts do. You deposit your savings and then the bank pays you interest according to the account terms.
High-yield savings accounts have a variable APY. So, after you open a high-yield savings account, the initial interest rate may increase or decrease. This is why high-yield savings accounts really shine during periods of higher interest rates, such as during the past few years. The U.S. Federal Reserve started aggressively raising interest rates in March 2022, and as of May 1, 2024, they have yet to lower them. This has resulted in spiking yields for high-yield savings accounts, and they remain elevated.
How Much Money Does a High-Yield Savings Account Earn?
According to the Federal Reserve, the national rate paid on all savings accounts is only 0.46%. By way of comparison, many high-yield savings accounts currently pay 10 times that rate or more. Here are five high-yield savings accounts with rates between 4.20% and 5.20% APY. None of these offerings have minimum account balance requirements or monthly fees.
Account | APY |
|---|---|
Ally Bank Online Savings Account | |
Bask Bank Interest Savings Account | |
Capital One 360 Performance Savings Account | * |
Up to | |
Synchrony Bank High Yield Savings |
Why You Need a High-Yield Savings Account
Nearly every investor would benefit from having a high-yield savings account. This is because everyone should be saving money, ideally for a few different goals. A high-yield savings account is not typically recommended for retirement savings or other long-term savings goals. While a high-yield savings account is not a good option for long-term savings goals, like retirement, it is an ideal savings vehicle for stashing money you’ll need to access for your short-term goals in the next few years.
If your emergency fund is currently in a traditional savings account, consider moving it to a high-yield account where it can earn more for you. You can access your funds in a high-yield account just as quickly as you can with a traditional one if a financial emergency arises, and you’ll still have the same FDIC insurance.
Downsides to Having a High-Yield Savings Account
Considering the higher APYs and easy-to-meet requirements of many high-yield offerings, opening a high-yield savings account may seem like a no-brainer. But, is opening a high-yield savings account always a good idea?
Here are a few downsides of a high-yield savings account.
Rates Can Fall
High-yield savings accounts are booming right now because they are paying their highest rates in years. But once rates start to fall, as many anticipate towards the end of 2024, savings APYs will drop as well. Although a number of accounts are currently paying over 5%, those same accounts were paying less than 1% just a few years ago. This is why you can’t rely on any type of savings account, even a high-yield one, to achieve long-term investment goals.
Potential Hidden Fees
Although most high-yield savings accounts don’t charge monthly maintenance fees, there may be other fees that can eat up all your interest if you aren’t careful. Charges for ATM withdrawals, wire transfers or overdrafts are things you should be aware of before you choose a high-yield savings account.
How To Choose a High-Yield Savings Account
Choosing a high-yield savings account is just like picking the right type of any account. You’ll want to find the one that provides the features and benefits you need while charging you the lowest fees. This way your money can earn the most that it can while still being safe and accessible.
Before opening any new bank account, compare the account requirements, fees and APYs of accounts at several financial institutions. Make sure you choose an account that best meets your savings needs. Find and choose from several options with minimal requirements, no or low fees, and a stellar APY.
Online banks are often your best choice when it comes to high-yield accounts, mainly because they can offer higher yields due to their lower operating costs. They typically charge no fees as well. But every bank is different so be sure to review what each one offers and what it doesn’t. You should also verify that your bank is covered by FDIC insurance. Most are, but some online banks may not be, so it pays to double-check with something that important.
How To Open a High-Yield Savings Account
Most banks now allow you to open an account online. However, whether you visit a local bank branch or apply online, you may need to provide the following to apply for an account:
Personal information, such as name, address and date of birth
Government-issued ID
Social security number
An opening deposit.
Not all accounts require a deposit at the time of account opening, but some banks may automatically close your account if it is not funded within a specified number of days.
Final Take
While some high-yield savings accounts might have fees for excessive withdrawals and may not provide an ATM card for easy access to your funds, the same is true for many traditional savings accounts. Since many traditional savings accounts come without fees and strict account requirements, it makes good financial sense to upgrade to a low- or no-cost option that will pay you significantly more interest on your money.
Carefully comparing financial institutions and thoroughly reviewing their account requirements and terms can help you ensure that you’re choosing a high-yield savings account with low fees.
More on Savings Accounts
Andrea Norris contributed to the reporting for this article.
*Capital One interest rates accurate as of May 9, 2024. See website for all current rates.
Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of May 9, 2024.
Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.
This article originally appeared on GOBankingRates.com: High Yield Saving Accounts: How They Work and Why You Need One
