What Is a High-Yield Savings Account?
A high-yield savings account is a type of savings account that offers interest rates up to 10 to 12 times higher than the national average of a standard savings account.
In the past, individuals typically maintained a savings account at the same bank as their checking account for convenient transfers. However, with the emergence of online banks and the increased utilization of online accounts by traditional banks, competition for higher savings rates has intensified, leading to the advent of “high-yield savings accounts.”
Key Takeaways
- The interest rates on high-yield savings accounts can be 10 to 12 times higher than those of traditional savings accounts.
- The most competitive rates are often offered by online banks.
- Setting up electronic transfers between a high-yield savings account and a checking account, even if they are held at different banks, is straightforward.
- When selecting a high-yield savings account, compare criteria such as initial deposit requirements, interest rates, minimum balance requirements, and fees.
High-Yield Savings Differences
The disparity in interest rates between high-yield savings accounts and the national average is substantial. For example, if you have $5,000 in a conventional savings account with a 0.39% annual percentage yield (APY), you would earn $19.50 over a year. In contrast, depositing the same $5,000 in an account with a 4.5% interest rate would yield $225 in interest.
To maximize interest earnings with your savings, you may need to maintain your savings account at a different institution from your checking account. The availability of electronic transfers between institutions facilitates the seamless movement of funds between checking and savings accounts, even if they are housed in different banks.
Unlike traditional brick-and-mortar banks that offer comprehensive banking services, institutions providing high-yield savings accounts often have limited features and may not offer checking accounts or ATM cards. Transactions such as withdrawals and deposits are typically conducted through electronic bank transfers or mobile check deposits.
One critical similarity between traditional savings accounts and high-yield variants is the federal insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association (NCUA). These entities safeguard your deposits against bank and credit union failures for up to $250,000 per account.
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How to Use a High-Yield Savings Account
A high-yield savings account should form a part of your comprehensive financial portfolio. Determine the best way to utilize the account alongside other accounts to align with your broader investment strategy. Decide on the amount of cash to reserve based on your objectives and financial plan. For instance, if the account serves as an emergency fund, consider maintaining at least three to six months’ worth of living expenses in the account.
The strategy can differ if you are using a high-yield account to save for a significant purchase, such as a home, vehicle, or vacation. In such cases, consider leveraging a high-yield savings account to safeguard your principal while channeling interest earnings towards your savings goal.
You might choose to open a high-yield savings account solely for cash management purposes. While most checking accounts offer minimal to no interest, transferring extra funds into savings when not in immediate use can lead to higher monthly interest payments. Remember that your interest income is subject to annual taxation.
Many banks allow the opening of multiple savings accounts, which can be personalized with specific nicknames (e.g., Car Fund, Hawaii Vacation, etc.). Alternatively, consider opening a high-yield savings account at multiple top-tier institutions.
Having multiple savings accounts could facilitate progress towards your financial goals and maintain organized funds targeted at specific objectives.
What To Look for in a High-Yield Savings Account
Whether seeking a high-yield account from a new or existing bank, it is crucial to compare offerings across the market. Variations in interest rates and fees can impact returns over time, particularly if maintaining a sizable balance in savings. Here are essential considerations when evaluating and comparing accounts:
1. Interest Rate
What is the current interest rate on the account? Is it a standard rate or a promotional introductory rate?
Savings account rates are typically adjustable and subject to change. Some accounts may offer the advertised rate for a limited initial period. Additionally, check for any minimum or maximum balance requirements to qualify for the advertised rate.
2. Required Initial Deposit
How much is needed to open the account? Are you comfortable with the minimum deposit amount?
3. Minimum Balance Required
What is the minimum balance stipulated for the account? Falling below this threshold could result in fees that may outweigh interest earnings.
4. Fees
Are there any fees associated with the account? If so, what steps can you take to avoid these charges, such as maintaining a balance above the specified minimum threshold?
5. Links to Other Banks and/or Brokerage Accounts
Does the bank permit linking your high-yield savings account to deposit accounts at other banks or brokerage firms? Are there constraints on linking multiple accounts or any waiting periods for new account links?
6. Accessing Your Money
What methods are available for withdrawing funds? Can you use an ATM card to access funds from your savings?
7. Deposit Options
Does the bank offer a smartphone app with mobile check deposit functionality if you plan to deposit checks into the account? Alternatively, can you mail in checks or deposit them via an ATM?
8. Compounding Method
Banks can compound interest daily, monthly, quarterly, semiannually, or annually. More frequent compounding theoretically enhances your net yield. If comparing accounts based on Annual Percentage Yield (APY), the compounding frequency is already factored in.
How to Open a High-Yield Savings Account
If your bank provides a competitive high-yield savings account, opening a new account should be straightforward. Minimal personal information may be required as you are likely already verified by the institution.
In the case of setting up a savings account at a new institution, the process may be more intricate but generally can still be completed online. Most high-yield savings accounts can be opened digitally by submitting key personal details. Have your driver’s license, Social Security number, and primary bank account information available.
Where Can a Consumer Find a High-Yield Savings Account?
Online banks offer the most competitive rates, but it’s also worth exploring high-yield savings account options at your current banking institution. Compare rates and terms across several accounts.
What Are the Main Things To Look at in a High-Yield Account?
Research and compare factors such as initial deposit requirements, interest rates, minimum balance requirements, fees, links to other banks and/or brokerage accounts, access to your money, deposit options, and compounding method.
Can You Withdraw Money From a High-Yield Savings Account?
Yes, consumers can withdraw or transfer funds from a high-yield savings account. The previous limit of six monthly withdrawals from a savings account was revoked in 2020.
The Bottom Line
A high-yield savings account is an excellent choice for safely storing surplus funds you do not require immediately, offering higher returns compared to traditional savings accounts, and being low-risk due to federal insurance coverage up to $250,000. Evaluate the advantages and disadvantages of high-yield savings accounts against alternative options like investment accounts. Compare terms across various accounts to identify the one that aligns best with your objectives and financial circumstances.