High-Yield Savings Accounts

Whether you are wealthy or working class, you need an emergency fund. And there’s no better way than saving your hard-earned money in a high-yield savings account.

Here’s how high-yield savings accounts work, and how to choose the best one for your specific needs.

What is a High-Yield Savings Account?

High-yield savings accounts allow your money to grow faster than in a traditional savings account, thanks to the higher interest rate.

These accounts are federally insured and earn rates much better than the national average. They earn around 1.50% APY, and by comparison, the national average is around 0.13%.

How Does a High-Yield Savings Account Work

High-yield savings accounts work the same way as traditional savings accounts, but they usually have a higher rate of interest and accrue interest faster.

It’s a deposit account offered by credit unions and banks, with a much higher interest rate than traditional brick-and-mortar banks.

This is how it works:

1. Deposit money into the account. You may need to maintain a certain minimum balance.
2. Your bank pays interest. Interest compound daily, monthly, or quarterly depending on the bank. It is added to your account balance.
3. Withdraw from your account as needed. You can only withdraw as many times as you need from a high-yield savings account.

High-yield savings accounts are subject to fees, which can include withdrawal fees, maintenance fees, and service fees. However, some high-yield savings accounts have no monthly fees, like the Savings Connect account from CIT Bank, which only requires a minimum of $100 to open an account.

But before you open a high-yield savings bank account, compare and take into account all the limitations.

Traditional Savings vs. High-Yield Savings Account

High-yield savings accounts typically offer a significantly higher annual interest rate than traditional savings accounts. How much difference can a higher APY on your savings account make? Here’s an example.

Let’s assume you want to open a new savings account with $1K and save an additional $10 per month. Bank A offers a regular savings account paying 0.07% interest, whereas bank B offers a high-yield savings account paying 0.5% interest.

During the first year, you would get $1.16 in interest on your money, while Bank B would earn you $8.27 for the same savings.

Although these are small earnings, it’s an example that illustrates the difference between traditional and high-interest savings accounts. 

High-Yield Savings Account vs. Money Market Account

In contrast to many money market accounts, high-yield savings accounts typically don’t allow account users to draw checks against the account.

The only difference between money market and high-yield savings accounts is that they are both commonly offered by FDIC-insured banks.

Money market accounts are significantly more prevalent than savings accounts, however many institutions provide both.

How to Choose a High-Yield Savings Account

Annual Percentage Yield

The APY is one of the most important aspects of any high-yield savings account. APY stands for Annual Percentage Yield and it incorporates compound interest.

Compound interest means that the interest you earn on your money grows over time, so if you started with $100 and earned 4% interest per year, after five years you would have $104. If you then earned another 2% interest per year, your total interest would grow to $108. 

To calculate your potential earnings on a savings account, you need to multiply the APY by the number of years you plan to save.

For example, if you have a 1% APY and plan to keep your money in a savings account for 10 years, your potential earnings will be $1,010.

💡 Tip: Use our compound interest calculator to calculate your potential savings.

Minimum Deposit Requirements

If you’re looking for a low-risk investment option, there’s no need to put down a large sum of money right away. Some accounts require $100 to open an account while others can require $10,000 or more.

Many online banks offer accounts with no minimum deposits or even no monthly maintenance fees. Some even allow you to keep your funds in a checking account if you prefer. Always decide what you can realistically afford.

Minimum Balance Required

Some high-yield savings accounts require a minimum balance to open an account. These accounts may also have a minimum amount of money to keep in your account to earn the APY rate.

However, what’s important to remember is that many high-yield savings offers will not allow you to earn interest if your balance drops below the minimum amount.

If you plan on using the money in your account frequently, then it might be best to choose a bank that doesn’t impose minimum balances.

Withdrawal Options

Withdrawals are not allowed from checking accounts unless you pay a fee. You can also transfer funds out of your account if you close the account. If you withdraw all of your money, you will lose access to your account.

There are certain exceptions to the rule, like when you need emergency cash or when you deposit checks.

How To Open a High-Yield Savings Account

Steps

Are High-Yield Accounts Safe?

Safety is an important feature of high-yield savings accounts. They are insured by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Share Insurance Fund (NCUSIF) for up to $250,000.

If you lose money due to theft or fraud, your account will be reimbursed. You should also check your account frequently for unauthorized withdrawals or transactions and report them immediately to the bank.

Conclusion

High-yield savings accounts (HYSA) are an essential financial product if you’re building an emergency fund or planning on saving up for something in the near future.

You can get more return on your money than you could in a brick-and‑mortar bank account because your cash is safe and accessible.