What Is a High-Yield Savings Account?

Updated: June 14, 2024

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A high-yield savings account is a type of deposit account that typically offers higher interest rates than a traditional savings account. These accounts are designed to help your money grow faster by earning you more interest on your deposits.

A high-yield savings account combines the accessibility of a regular savings account with the potential for higher returns. Key features include higher interest rates, FDIC insurance coverage, online accessibility and limited withdrawal options.

Key Takeaways

As of 2024, high-yield savings account rates are above 4.0% annual percentage yield (APY), which is higher than the national average of approximately 0.45% APY for traditional accounts.

High-yield savings accounts offered at banks and credit unions are insured by the FDIC or National Credit Union Administration (NCUA).

Some high-yield savings accounts have drawbacks, such as requiring minimum balances or only allowing a limited number of transactions per month.

How High-Yield Savings Accounts Work

A high-yield savings account is a deposit account that offers a higher APY than a normal savings account. The interest is calculated based on the account balance and is compounded daily, monthly or quarterly, allowing your money to grow faster. As of April 2024, the average APY on savings accounts is 0.45%, according to FDIC data.

If you open a high-yield savings account with a $10,000 balance and an APY of 4.5%, compounded daily, you would earn approximately $450 in interest after one year. High-yield savings accounts are one way to grow your money. Your personal goals, tolerance for risk and investment time frame may make other options more suitable.

The benefits of compounding interest go up significantly with the amount of money you have available to deposit into the account.

Account Type
APY
Initial Deposit
Pre-Tax Annual Yield

High-Yield Savings

5.00%

$1,000

$50.00

Traditional Savings

0.5%

$1,000

$5.00

Uses of a High-Yield Savings Account

High-yield savings accounts are ideal for things like building emergency funds, planning for short-term savings goals or holding funds before investing.

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    Emergency Funds

    You can grow your emergency fund more quickly with a higher interest rate, which can encourage you to save more for future expenses.

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    Short-Term Savings Goals

    The higher APY and easy access to funds make high-yield savings accounts perfect for saving up for short-term goals like a down payment on a house or a large purchase.

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    Holding Account for Investment Funds

    If you're undecided about where to invest, a high-yield savings account can be used as a holding account where your money can earn more interest.

FDIC Insurance

High-yield savings accounts offered by FDIC-insured banks are covered by the Federal Deposit Insurance Corporation (FDIC) up to the maximum limit of $250,000 per depositor, per insured bank, for each account ownership category. This insurance protects your deposits in case the bank fails or goes out of business.

With deposit insurance, opening a high-yield savings account is a safe way to earn interest at higher rates. Credit unions that are federally insured by the NCUA also provide deposit insurance.

Benefits and Drawbacks of High-Yield Savings Accounts

High-yield savings accounts, while offering attractive interest rates and safety for your savings, come with their own pros and cons.

Benefits of High-Yield Savings Accounts

  • Higher Interest Rates: The primary benefit of high-yield savings accounts is the ability to earn substantially higher interest rates compared to traditional savings accounts.

  • Compounding Interest: Interest in high-yield savings accounts is typically compounded daily or monthly, which means you earn interest on both your principal and the accumulated interest.

  • Liquidity and Access: High-yield savings accounts offer easy access to your funds compared to other investment options.

  • Insurance Protection: As long as the account is held at an FDIC-insured bank or a credit union insured by the NCUA, your deposits are protected up to the insurance limit, currently $250,000 per depositor, per insured bank, per ownership category.

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COMPARING LIQUIDITY ACROSS SAVINGS STRATEGIES

While high-yield savings accounts usually offer higher yields compared to traditional savings accounts, their returns are typically lower than those of certificates of deposit (CDs) or money market accounts.

The key advantage of high-yield savings accounts over CDs is their liquidity. You can withdraw funds from a high-yield savings account without incurring a penalty, which you can’t do with CDs.

Money market accounts may offer marginally higher rates but usually come with higher minimum balance requirements.

Drawbacks of High-Yield Savings Accounts

  • Fees and Minimum Balance Requirements: Some high-yield savings accounts may charge monthly maintenance fees or require a minimum balance to be maintained to avoid fees or earn the advertised APY.

  • Limited Transactions: Some banks may limit certain types of withdrawals and transfers from savings accounts per month. Exceeding this limit can result in fees or account conversion.

  • Interest Rate Changes: Banks can change the interest rates on high-yield savings accounts at any time, which tend to fluctuate with market conditions.

  • Early Withdrawal Penalties: Some high-yield savings accounts may impose penalties for withdrawing funds before a specified time frame, limiting the liquidity of your savings and potentially offsetting the interest earned.

  • Higher-Yield Options Available: Depending on your savings and investment goals, there may be better options to get a high yield on your money, such as investing in the stock market.

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WHEN TO AVOID USING A HIGH-YIELD SAVINGS ACCOUNT

For long-term goals like retirement, other investment vehicles like stocks or mutual funds are typically better. These investments come with higher risk but also have the potential for higher returns over time.

How to Find the Best High-Yield Savings Account

Banks may have different requirements for maintaining special interest rates on their accounts. When searching for the best high-yield savings account, consider these areas to avoid losing money to extra fees:

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    Interest Rate

    The higher the APY, the faster your savings will grow. Compare rates from traditional and online banks to maximize your earnings.

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    Initial Deposit

    Some accounts may require a minimum initial deposit.

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    Minimum Balance Requirement

    Be aware of any minimum balance requirements to avoid fees or maintain the advertised APY.

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    Fees

    Know the monthly maintenance fees or other charges so they don’t eat into your interest earnings.

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    Compounding Frequency

    Accounts that compound interest daily or monthly will grow your money faster than quarterly or annual compounding.

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    Access to Money

    Consider how easily you can access your funds if you need them, and the number of withdrawals or transfers allowed each month.

How to Open a High-Yield Savings Account

Opening a high-yield savings account is a straightforward process that can be completed online or at a bank branch.

1
Research rates

Compare rates (APYs) offered by traditional banks, online banks and credit unions. Check the minimum balance requirements, fees and extra features like easy transfers.

2
Get your information ready

You'll likely need your Social Security number, ID and other contact information.

3
Open Your Account

You can open an account in-person at many institutions or complete an online application.

4
Fund Your Account

Transfer money from your existing account electronically, set up a direct deposit or transfer, or provide a check.

Alternatives to High-Yield Savings Accounts

High-yield savings accounts can be a great way to build up your savings, but there are other options depending on your goals and risk tolerance:

Alternative
Description

CDs typically offer higher interest rates than savings accounts, but require you to lock in your funds for a fixed term. They can be a good choice if you have a specific savings timeline and don't need immediate access to the money.

Money Market Mutual Funds

These are short-term, low-risk investments that invest in short-term, low-risk debt instruments like CDs and commercial paper.

These may have slightly higher returns than high-yield savings accounts but lower liquidity. These accounts combine features of savings and checking accounts, offering higher interest rates than traditional savings accounts while allowing limited check-writing capabilities.

Investment Accounts

If you have a higher risk tolerance and longer-term goals, investing in stocks, bonds, or funds such as ETFs can potentially yield higher returns than a savings account. The risk of these investments is greater than saving accounts and is better suited for long-term goals.

FAQ: High-Yield Savings Accounts

Get answers to common questions about high-yield savings accounts.

Are earnings from high-yield savings accounts taxed?
Are high-yield savings accounts safe?
Can I withdraw money from a high-yield savings account?
How can I access my money in a high-yield savings account?
How often do interest rates on high-yield savings accounts change?
Can I lose money in a high-yield savings account?

About Alvin Yam, CFP


Alvin Yam, CFP headshot

Alvin Yam is a certified financial planner (CFP) with over 15 years of experience working with individuals and corporations. Before founding Paraiba Wealth Management, he was a director at HSBC and a financial consultant at Charles Schwab. Yam is MoneyGeek's expert consultant on wealth management and personal banking.

Yam earned his bachelor's degree in political science from the University of California, San Diego and his Master of Business Administration from Loyola Marymount University.


sources
Shield Insurance

The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.