A high-yield savings account is a savings account that pays interest rates that are higher than those on traditional savings accounts. Depositing your money in a high-yield account can help you save more money.
Let’s take a closer look at what a high-yield savings account is and how it works, so you can determine if opening one is right for you.
Definition of a High-Yield Savings Account
A high-yield savings account is a savings account that has a higher interest rate than a traditional savings account. It can be a good option if you’d like to save for a house, car, home improvement project, or other long-term goals.
High-yield savings accounts are often offered by online banks, which have lower overhead costs and can pass the savings on to customers in the form of higher interest rates. However, traditional banks and credit unions may also offer high-yield savings accounts.
Let’s say you deposit $10,000 into a traditional savings account that pays an interest rate of 0.01%. After one year, you’ll earn $1. If you put the money in a high-yield savings account that pays an interest rate of 0.5% instead, you’ll earn $50 in the same time period. So you would earn $49 more.
Shop around to compare the terms and yields on high-yield savings accounts so you can find the right one for your needs. Learn about minimum balance requirements, fees, and other features.
How a High-Yield Savings Account Works
The specific features of high-yield savings accounts vary by financial institution. Depending on the account you open, you could see benefits such as no minimum balance requirements, free transfers, no monthly maintenance fees, and online account management or digital banking tools.
Opening a high-yield savings account is straightforward and similar to the process of opening a checking or traditional savings account. In most cases, you’ll fill out an application online or via a mobile app. You provide basic personal information, including your name and Social Security number, as well as information from your government-issued ID, such as a driver’s license or passport.
Most high-yield savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for deposits up to $250,000. Your money will be insured up to that level, regardless of what’s going on in the economy.
A money market account essentially is a high-yield savings account that has some features of a checking account. You can access the money via a debit card or check as often as you’d like.
Most banks and credit unions that offer high-yield savings accounts will perform a soft inquiry rather than a hard inquiry when you open an account. With a soft inquiry, your credit score is not affected.
Pros and Cons of High-Yield Savings Accounts
Before you open a high-yield savings account, consider all the advantages and drawbacks.
Earn more interest
No additional fees
Fluctuating interest rates
Not ideal for long-term wealth
- Earn more interest: The significant benefit of a high-yield savings account is the high interest rate you can earn on the cash you stash. With a high-yield savings account, you’ll get more return on your money.
- Low risk: The FDIC will insure deposits of up to $250,000, including for high-yield savings accounts.
- No additional fees: Many high-yield savings accounts have no monthly fees or minimum balance requirements. However, some high-yield savings accounts do charge fees, so it’s important to read the fine print before you commit to one.
- Fluctuating interest rates: The interest rates on high-yield savings accounts are variable, meaning they can change at any time.
- Not ideal for long-term wealth: While a high-yield savings account can help you with short-term savings goals, it’s not ideal for long-term investing. Other accounts such as 401(k)s and IRAs are typically better options for saving for retirement and college because they have tax advantages and the potential for larger gains.
- Withdrawal limits: Even though you can access your money in a high-yield savings account, you’re often limited to a certain amount of withdrawals before you have to pay a fee.
Alternatives to High-Yield Savings Accounts
High-yield savings accounts are safe places to store your money while earning a higher interest than traditional savings accounts, but other investment options have the potential to earn even more. If you want to earn a higher interest rate on your money, consider these alternatives:
- Certificates of Deposit (CDs): A CD requires you to tie up your funds for a specific period of time until you reach a maturity date, such as one year or five years. In return, you get a higher, guaranteed interest rate.
- Individual Retirement Account (IRA): While IRAs are designed for retirement savings goals and come with early withdrawal penalties, depending on how you invest, they can help you save more than a high-yield savings account. An IRA also has tax advantages.
- 401(k): A 401(k) is an employer-sponsored retirement plan. Just like an IRA, it allows you to save for retirement with tax advantages. Employers often match 401(k) contributions. If you’re an entrepreneur or self-employed, you can open a solo 401(k).
- A high-yield savings account usually has a higher interest rate than a traditional savings account, so your money can grow at a faster rate.
- Many high-yield savings accounts do not charge monthly fees nor have minimum balance requirements.
- Alternatives to high-yield savings accounts include CDs, IRAs, and 401(k)s, although you may face early-withdrawal penalties.