You’ve probably heard that you should “save for a rainy day” or that it’s a good idea to stash away three to six months’ of expenses away in an emergency fund. But where you save that money also matters, because savings accounts are not all created equal. There is a big difference between traditional savings accounts compared to high-yield savings accounts.
High-yield savings accounts can boost the interest you earn on your deposits and get you a bigger return. In this guide, we’ll cover what a high-yield savings account is and how it works, plus how to find one to help you meet your financial goals.
What is a high-yield savings account?
When you choose a bank, you typically have the option to open a checking and savings account. Your bank may offer a traditional savings account that earns interest on deposits. However, that interest rate is usually fairly low.
In contrast, high-yield savings accounts offer higher interest rates than standard savings accounts. In fact, high-yield savings accounts rates could be 20 to 25 times higher than the national average for standard savings accounts.
So think of a high-yield savings account as a turbocharger for your savings. If you want to get the highest return on your savings’ deposits, a high-yield savings account is a good option.
How interest rates work
The main perk of high-yield savings accounts is that, as implied, offer the highest rates in interest earnings is higher, which means you can earn more on your deposits. Savings rates are referred to as Annual Percentage Yield (APY), which is the interest you get after a year.
Aside from the APY, compounding also affects how much you earn. The top high-yield online savings accounts compound daily, which means that you can earn the highest APY on what’s in your account every day. It’s important to note that might not be the case for all banks, and even if you are earning high rates every day you may only get a payout once a month.
Having one of these accounts, whether through mobile banking or bricks and mortar banks, can offer more competitive rates savings account interest rates than traditional savings accounts.
Let’s review this example from the Capital One website:
“If you put $10,000 into a high-yield savings account at a 2% APY and don’t touch it, you’ll have $10,201.84 after a year. You get that number thanks to adding compound interest (the 2% APY) to the principal (the original $10,000). But if your money earns only 0.01% in a traditional account, you’ll have $10,001 at the end of the year. You can see how this adds up. $10,000 at 2% grows by $201.84 at the end of the year compared to just $1 at 0.01%.”
As you can see, there’s a big difference between earning $201 compared to just $1. If you hold onto that amount for years as an emergency fund, you could earn a decent amount. It should be noted that at this time, it’s also rare to see a 2% APY, so the interest you earn may not have as big of a gap.
What you should know about high-yield savings accounts
High-yield savings accounts are an attractive option for savers who want their money to work for them. But there are some things to consider as well.
FDIC stands for Federal Deposit Insurance Corporation (FDIC) and is an agency to protect consumers in the event of bank failure. Many banks, including high-yield savings accounts, are FDIC insured which protects your deposits up to $250,000. Whether you have a traditional savings account, a high-yield savings account, or a money market account, you’re insured if the bank is member FDIC.
Annual percentage yield
What makes high-yield savings accounts stand out is their APY. APY stands for Annual Percentage Yield, which is how interest is expressed for this account. APY refers to the interest and the return you get in a year’s time.
The APY is much higher than standard savings accounts, but can also vary among banks as well.
On top of that, the APY can change at any time. When the Federal Reserve cuts interest rates, banks typically follow and adjust their interest rates. In 2020, interest rates dropped significantly, near zero percent. After that, many high-yield savings accounts also lowered their APY.
Some high-yield savings accounts have a minimum initial deposit in order to open an account. If you’re just starting to save you want to look for a new account with no minimum deposit.
Another thing to look out for is to see if the high-yield savings account requires a minimum balance. This is the account balance required in order to receive a specific benefit, such as not paying a monthly maintenance fee or earning interest on the account.
Managing your savings takes some work, so you want to look at how convenient the high-yield savings account is. Does it offer a mobile app? Is it easy to transfer money and access your account? Can you get support if you need it?
Accessibility is something that should be considered when choosing a high-yield savings account. You want to consider how easy it is to access your money.
For example, if you need to transfer money from your savings account to your checking account, how long will it take?
It’s also important to note that there is a federal law that limits how many times you can touch the funds in your savings account. You can withdraw money from your savings account up to six times, due to Regulation D.
However, there is a current suspension on this cap. The Federal Reserve scrapped this limit in April 2020 due to the pandemic and the subsequent economic consequences.
You also want to check to see if there are any fees associated with the high-yield savings account. Many of these accounts don’t have any fees but some have monthly maintenance fees. You may be able to avoid some of these fees by keeping a certain balance.
What you can do with a high-yield savings account
You can use a high-yield savings account for a variety of different reasons. For example, you could use the account for:
- Saving money for your emergency fund
- Putting money aside for a future vacation
- Saving for a down payment on a house
Having a high-yield online savings account is a good place to safely work on savings goals, while also earning more interest.
Best high-yield savings accounts
If you want to park your money in a high-interest savings account, there is no shortage of banks to choose from. Many of the places are online banks that can offer the best rates. Here are the top places you can open a high-yield savings account.
Marcus by Goldman Sachs
Marcus by Goldman Sachs is highly-rated, claiming their rates are higher than 4x the national average. You will pay zero in fees and have the ability to make same-day transfers. There is also no minimum deposit too. The mobile app offers 24/7 access as well as the convenience to manage your money from your phone.
Discover, which might be more well-known for its credit card, also offers a high-yield savings account as one of their financial products. The bank touts up to 5x the national average and has no minimum deposit. On top of that, there are no monthly maintenance fees.
Ally bank is one of the top online banks and has been the darling of the high-yield savings account world, even being named the Best Online Bank of 2019-2020 by Money magazine.
Using Ally, you can have different savings buckets so you can work toward meeting all of your financial goals. Ally is an attractive option, as there are no monthly maintenance fees or minimums you must maintain. The site claims you can earn up to 10x the national average and also your interest is compounded daily.
Vio bank has a $100 minimum deposit to open an online high-yield savings account and has no monthly fee. Plus, your interest earns daily so you can earn interest fast. The bank also offers customer service representatives that you can speak to on the phone.
American Express National Bank
You might know of American Express credit cards, but their bank also offers a high-yield savings account. There are no fees or minimums and according to their site, you can earn 10x more than a standard savings account. You can also speak to someone on the phone 24/7.
Axos bank has recently celebrated its 20th anniversary. The bank offers a high-yield savings account that has no minimum balance requirements and also won’t charge you any monthly fee. You do need $250 as a minimum deposit to open a bank account. You can even get a debit card by request.
The Barclays online high-yield savings account has no minimum deposit requirements and has no monthly maintenance fees. You can connect direct deposit to this account and you have 24/7 access to your account. According to their site, their APY is 5x greater than the national average.
Capital One 360
Capital One 360 has a high-yield savings account that can earn you up to 5x the national average, according to their site. The account has no monthly fees nor any minimum deposits or minimum balance requirements. The bank has a premium mobile app for saving and includes mobile check deposit.
The bottom line
A high-yield savings account is like the traditional savings account cooler older brother. It earns you more on your deposits and can be an effective tool to save for your financial goals. Right now, there are many financial institutions to consider if you want to start saving, so review the pros and cons and get the most out of your savings.