What Is a High-Yield Savings Account?

What Is a High-Yield Savings Account?
10 min read

A high-yield savings account is a type of savings account that typically pays 20 to 25 times the national average for a standard savings account. 1 Traditionally, people have a savings account with the same bank where they maintain their checking accounts, making transfers between the two quick and easy. But with the advent of online-only banks, in addition to traditional banks that opened their doors to customers across the country using online account opening, competition for savings rates rose, creating a new category of “high-yield savings accounts.”

Given the difference between the high-yield savings account rates and the national average, the increase in earnings is significant. If you have $5,000 in savings, for example, and the national average is 0.10 percent APY, you'll only return $5 over a year. If you instead put the same $5,000 into an account that earns 2 percent, you'll earn $100.

KEY TAKEAWAYS

  • Interest rates on high-yield savings accounts can be 20 to 25 times higher than what traditional savings accounts offer.
  • You may be able to open a high yield savings account where you are already financing but often the highest rates are only available from online banks.
  • It's easy to set up electronic transfers between a high yield savings account and your checking account even if you keep them at different banks.
  • As you consider different options for a high-yield savings account, consider factors such as initial deposit requirements, interest rates, minimum balance requirements, and any potential account fees.

The trade-off for significantly more profit is that you may need to keep your savings account at one institution and a checking account at another. While this may seem awkward at first if you're familiar with both accounts held at one bank, the current availability of electronic transfers between institutions - and the speed at which such transfers can be carried out - makes transferring money between your checking account at Bank A and your savings account. Being in Bank B is relatively simple.

You may also find that, unlike traditional institutions that offer a one-stop shop for all your banking needs, those that offer high-yield savings accounts typically limit their features or offer little or no other products. Not many offer checking accounts and few offer ATM cards, requiring all inflows and outflows to a savings account to occur via electronic bank transfer or mobile check deposit if available.

But rest assured that one important advantage is the same between traditional savings accounts and their high-yield counterparts: the federal insurance they offer against bank failures from the Federal Deposit Insurance Corporation (FDIC) and credit union failures from the National Credit Union (NCUA).2 3 When you think In opening an account at a new institution, simply verify that it is an FDIC or NCUA member.

You'll also find that federal regulations limiting savings account withdrawals to six per month will apply to any type of bank savings account, whether it's a traditional or high-yield account. It is worth learning how to find and open a high-return account and consider whether it is worth adding an account to your portfolio.

Decide how to use a high-yield savings account

A high-yield savings account should, of course, make up only a part of your overall financial portfolio. Consider how best to use the account to complement your other savings and investing strategies and from there determine how much cash you think is wise to keep liquid in your particular situation.

For example, is a savings account intended as an emergency fund? In this case, financial experts usually recommend having the equivalent of three to six months of living expenses on hand.

Perhaps instead use a high-yield account to save for a big purchase, such as a home, car, or big vacation, that you'll be making within the next five years. In this time horizon, it is best not to put money into investments that may lose value. So, periodically withdrawing money into a high paying savings account can help you protect your capital while applying interest earnings to your savings goal.

Still, others will open high-yield savings account not for a specific purpose but simply to house the excess cash they swarm from their checking account. Because checking interest rates is generally little or zero, turning the extra money into savings when you don't need it to cover everyday transactions can provide a monthly interest payment you wouldn't otherwise earn.

Of course, more than one of these options can be used to separate your savings from concurrent uses or goals. Many organizations allow you to open more than one savings account and even give them custom nicknames (for example, trunk, vacation 2020, etc.). Or you can open a high-return savings account in more than one high-profit institution. Multiple savings accounts can facilitate easy tracking of your progress toward goals and make it easier to take your hands off money you don't want to touch, like your emergency fund.

What to look for in a high-yield savings account

Whether you're shopping for a high-yield account at a new organization - or you're lucky enough to have an account offered at your current bank - it's always wise to compare options across the market. Differences in interest rates and fees can accumulate over time, especially if you maintain a relatively large balance of savings. Here's what to look for and compare with:

1. Interest rate:

How much interest is the account currently paying? Is it a standard price or an introductory promotional price? Savings account rates are generally flexible and can be changed at any time. But some accounts will determine that the currently advertised price is only available for an initial period of time. Another factor to look for is whether there is a minimum or maximum balance to earn at the promoted price.

2. Initial deposit required:

What is the amount required to open the account and are you comfortable with initially depositing this amount?

3. Minimum balance required:

How much money is required to keep in the account going forward? You'll want to feel comfortable that the minimum is always met because falling below that could result in a fee or invalidate the interest rate you expect.

4. Fees:

Does the bank or credit union charge any fees for this account? If so, what are the ways you can avoid it (eg, always keeping your balance above the minimum)? Also, if I exceed the federal limit of six withdrawals per month, what is the bank's fee for the violation?

5. Links to other banks and/or brokerage accounts:

Will the bank allow you to create links between your high-yield savings account and deposit accounts you hold at other banks or brokerages? Are there restrictions on linking multiple accounts or a waiting period for new accounts during which you cannot change your initial linked account?

6. Access to your money:

What additional options, if any, are there to withdraw funds? Can you withdraw money from savings using an ATM card?

7. Deposit Options:

If you anticipate that you will want to deposit checks into the account, does the bank have a smartphone app that provides check deposit via mobile? Otherwise, will you be able to mail checks or deposit them via an ATM?

8. Compounding method:

Banks can require that the interest be compounded daily, monthly, quarterly, semi-annually or annually. While frequent fitting will theoretically increase the return you get to the home, if you stick to comparing accounts by APY rather than APR, the compounding factor will actually be taken into account.

How to open a high yield savings account

If you are fortunate enough to have a competitive high-yield savings account available at your existing bank, opening a new account is easy. This will likely be possible through the online banking portal without having to enter personal information since you will already be verified with the institution.

If you are opening a savings account at a new organization for you, the process will be much more complicated, although none of it will be very complicated. Almost all high-yield savings accounts can be opened online, so you'll need to set aside 15 minutes or so when you can fill out the online application on your computer. You will also need to have your driver's license, Social Security number, and basic bank account information to facilitate the application process.

Bottom line

A high-yield savings account can be a beneficial middle ground for your money, offering the protection of your capital, the security of Federal Insurance, and a higher return than a regular savings account although lower than what you could earn on riskier investments. Just be sure to think about how one or more high-return accounts can best serve your financial goals and situation. Then, do your homework to find an account that will maximize your earnings while allowing you to avoid fees without imposing restrictions that don't suit your needs.

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