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What is a High-Yield Savings Account?
By Jessica Walrack MONEY RESEARCH COLLECTIVE
Saving money is a smart move, but could you be earning more interest on your nest egg? A traditional savings account offers very modest returns that don’t keep up with inflation. But high-yield savings accounts offer much higher interest rates, which can help protect your buying power and better support your savings goals. How do they work? How much can you earn? Here’s what you need to know.
Read on to learn:
- What a high-yield savings account is
- How high-yield savings accounts work
- How to choose a high-yield savings account
- High yield savings accounts vs. money market accounts
- How to open a high-yield savings account
- The bottom line on high-yield savings accounts
What is a high-yield savings account and how does it work?
A high-yield savings account is a deposit account held at a financial institution that provides a high interest rate, one well above the national average. According to data from the Federal Deposit Insurance Corporation (FDIC), the average annual percentage yield (APY) paid for FDIC-insured traditional savings accounts is 0.07%. Meanwhile, the best high-interest savings accounts have APYs which typically range from 0.50% to 1.00% but can go as high as 2.00% or even 3.00%.
How does a high-yield savings account work?
Every high-yield savings account comes with an APY, which tells you the rate of interest you’ll earn per year on the balance held in your account. But how do banks calculate that if your balance is constantly changing? The Federal Reserve requires that interest be paid on your full principal account balance each day. To do so, financial institutions have to multiply your daily balance by at least 1/365th of your interest rate.
Tip: Your bank or credit union can use your actual daily balance each day or your average daily balance over a certain period (often a month).
While interest must be calculated and paid daily, that doesn’t mean you receive it daily. Institutions can decide how often they’ll credit the interest to your savings account and if your interest will compound (i.e., if you’ll earn interest on your interest). When compound interest is offered, the institution can also decide how often it will compound — daily, monthly, or quarterly.
For example, with the Citi Accelerate Savings Account, interest is calculated using your actual daily balance. The bank also compounds interest daily and credits all interest earnings to accounts monthly. So if you had Citi’s current APY of 1.01% and kept $10,000 in the account for one year, you’d earn approximately $101.51 in interest. Your earnings would be sent to you in 12 monthly credits ranging from $8.42 to $8.50, increasing over time due to the compounding effect.
| Per month | Additions | Interest | Balance |
| Start | $10,000.00 | 1.01% APY | $10,000.00 |
| 1 | $0.00 | $8.42 | $10,008.42 |
| 2 | $0.00 | $8.43 | $10,016.85 |
| 3 | $0.00 | $8.43 | $10,025.28 |
| 4 | $0.00 | $8.44 | $10,033.72 |
| 5 | $0.00 | $8.45 | $10,042.17 |
| 6 | $0.00 | $8.46 | $10,050.63 |
| 7 | $0.00 | $8.46 | $10,059.09 |
| 8 | $0.00 | $8.47 | $10,067.56 |
| 9 | $0.00 | $8.48 | $10,076.04 |
| 10 | $0.00 | $8.48 | $10,084.52 |
| 11 | $0.00 | $8.49 | $10,093.01 |
| 12 | $0.00 | $8.50 | $10,101.51 |
How to choose a high-yield savings account
Wondering how you can find the best high-yield savings account for your situation? Here are the most significant factors to consider when shopping around.
APY
Always look at the APY offered by financial institutions to find out how much you can earn, and pay attention to any conditional requirements. Sometimes you’ll find tiers of APYs where you can earn more if you meet certain conditions. The higher your account’s interest rate, the more you’ll earn.
Compound interest
Financial institutions don’t have to offer compound interest, but some do. It’s worth checking to see if your interest will compound as it will help your balance grow over time. The more often interest compounds, the more you will earn.
Minimum balance requirements
Check if the account requires you to keep a minimum balance to earn interest or avoid fees. If you plan to keep a balance in the account that surpasses the requirement, this may not be an issue. However, you don’t want to lose your opportunity to earn if you can’t meet the minimum balance requirements.
Minimum initial deposit requirements
Some institutions require you to make a minimum deposit to open a new account, earn interest, and/or avoid fees. If there’s a deposit requirement, ensure it aligns with your needs.
Monthly service fees
Certain account providers require users to pay monthly maintenance fees. If you’re required to pay them, make sure the interest you receive will significantly exceed those monthly fees. Also, look out for other fees such as those for external transfers, overdrafts, excessive withdrawals, and dishonored checks.
Limits
Find out if the account places any limits on withdrawals or transfers. Federal law (Regulation D) no longer limits savings accounts to six “convenient” withdrawals or transfers per month — the law was suspended in 2020 and permanently lifted in 2021. However, some institutions still have limits in place. Ensure any limits suit how you plan to use the account.
ATM card/ debit card
Some savings accounts come with ATM cards while others don’t. If you prefer a debit card for easier access to your money, you’ll want to look for a bank that provides the option.
NCUA/FDIC-insured
Banks insured by the FDIC and credit unions insured by the National Credit Union Administration (NCUA) guarantee deposits up to $250,000 per institution, per user. All reputable banks are member FDIC and all reputable credit unions NCUA-insured.
Account management
Savings accounts with the highest rates are often offered by online banks, which means you’ll be managing all aspects of the account online. When that’s the case, the bank should offer a great online user experience, including mobile banking via a mobile app and an easy-to-use online dashboard for desktop and laptop users.
Customer service
Lastly, if you have a question or concern, you’ll want a friendly customer support representative who can take care of it quickly. Check out the institution’s customer support channels and customer reviews.
The best savings account providers are solid institutions you can trust, with great service and high savings account rates. Keep in mind that the earnings from a super high APY can quickly be canceled out by account fees, so it’s important to look at the whole picture. Additionally, be sure to read the fine print to find out if there are any conditions on high APYs that will prevent you from getting them.
High yields savings accounts vs. money market accounts
Before opening a high-yield savings account, should you consider money market accounts as well? Possibly. A money market account is another type of deposit account that can help you earn modest returns on your savings. The funds you deposit will earn interest based on the current interest rates in the money markets. These accounts also typically come with check-writing privileges, which aren’t available with many savings accounts.
The average APY on a money market account, according to the FDIC, is 0.08% — slightly higher than the average APY on a traditional savings account. However, like high-yield savings accounts, the best money market accounts often have APYs that range from 0.50% to 1.00%. Being so, these two products are competitive. You may want to consider money market offerings against high-yield savings account offerings to find the best fit for you.
How to open a high-yield savings account
If you decide to go ahead with a high-yield savings account, it’s fairly easy to open one. You can often go to a financial institution’s website and apply online. The application process typically requires you to:
- Verify your identity
- Sharing employment and income information
- Sign agreements and disclosures electronically
- Get approved or denied
- Upon approval, wire transfer funds to the account
You may also be able to go into a physical branch if a brick-and-mortar bank is offering a high-yield savings account. However, as mentioned above, online savings accounts often offer the best rates.
Summary of what is high-yield savings account
In short, high-yield savings accounts come with competitive rates significantly higher than the national average for savings accounts. They also present little-to-no risk and have low barriers to entry. As a result, they can be an excellent place to keep the money you’re saving for shorter-term goals such as a mortgage downpayment or a six-month emergency fund. However, you may want to compare them against money market accounts when shopping around, as they can offer similar returns.
