Have you been scrolling through personal finance advice but still don't know what a high-yield savings account is? High-yield savings accounts have become a popular choice for offering higher interest than a traditional savings account.
Sounds great, right? Keep reading, because this article explores what high-yield savings accounts are, how they work, and what to look for when opening one. We also list the pros and cons of a high-yield savings account, and share some expert tips to help you decide if this is the right savings strategy for you.
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What is a high-yield savings account?
At its core, a high-yield savings account is just like a traditional savings account. You deposit your money, let it sit, and watch it earn interest over time. But what sets it apart is the much higher interest rate.
How do high-yield savings accounts work?
While a regular savings account might offer interest rates that barely outpace inflation, a high-yield savings account typically offers annual percentage yields (APY) that are many times higher.
In 2023-2024, high-yield savings account rates typically range between 3% and 5% APY, which is much higher than the national average for traditional savings accounts, often below 1%.
“High-yield savings accounts provide a higher interest rate than regular savings accounts, usually because they’re online-based with low overhead costs,” says financial advisor Bill Gallagher. “So unless you need to frequently visit a physical location, high-yield savings accounts are a better option.”
In other words, you'll earn more on the money you’re already saving, without any extra effort.
Pros and cons of high-yield savings account
Right about now you might be looking for the catch—wondering what’s the downside of a high-yield savings account? As for any financial move you make with your hard-earned money, it's wise to consider the pros and cons of a high-yield savings account.
Benefits of high-yield savings accounts
- Higher interest rates: Obviously, this is the biggest win. If you want your savings to grow without doing much work, a high-yield interest savings account could be the solution.
- Safety: Most high-yield savings accounts are FDIC insured, meaning your money is protected (usually up to $250,000) if something happens to the financial institution.
- Liquidity: You can access your money easily. You won’t have to lock it away for months or years at a time in order to collect interest (as with a certificate of deposit or CD).
Disadvantages of high-yield savings account:
- Withdrawal limits: Some accounts may limit the number of withdrawals you can make in a month, typically six per federal guidelines. If you’re someone who moves money in and out often, this might feel restrictive.
- Variable rates: The interest rate on high-yield savings accounts can fluctuate depending on the economy. It’s not locked in like some other types of accounts. Another caveat: “They don’t provide the same return as higher-risk investments like stocks or bonds,” Gallagher says. “If you're not careful, the gains you get from these accounts could also be outpaced by inflation. So they should be part of a diversified portfolio.”
- Minimum balance requirements: Certain accounts may require you to keep a specific balance to earn the highest rates or avoid fees.
Is a high-yield savings account a good investment option?
If you’re looking for a low-risk way to grow your savings while keeping it accessible, a high-yield savings account is worth considering. Whether you’re building an emergency fund or simply want a better return on your savings, the flexibility and safety of these accounts make them a smart choice.
However, if you’re OK with locking your money away for a long-term goal, you might want to compare the benefits of a CD vs high-yield savings account to decide which option works best for you.
CD vs high-yield savings: Compare options
So, what's the difference between a CD and a high-yield savings account? With a high-yield certificate of deposit (CD), you can lock in a fixed interest rate that is typically higher than a high-yield savings account. But, the catch is you can’t touch your money until the CD matures—which can take anywhere from three months to five years.
If you’re thinking about CDs, you might want to consider the high-yield CD rates against the constraints of locking your funds away for a set period. If having easy access to your savings is non-negotiable, high-yield savings account rates are also beneficial for your money's growth, and you have the liquidity you need.
How to choose the best high-yield savings account for your needs
Not all high-yield savings accounts are created equal, so consider a few factors before choosing the one that’s right for you:
- APY: Look for the highest interest rates available, but be cautious of temporary promotional rates that might decrease after a set period.
- Fees: Avoid accounts that charge excessive maintenance fees or have strict withdrawal penalties.
- Accessibility: If you need to access your money frequently, look for an account with an easy-to-use mobile app or online platform.
- Minimum balance requirements: Make sure you’re comfortable with any minimum balance needed to earn the highest APY or avoid fees.
How to open a high-yield interest savings account
Opening a high-yield savings account is a straightforward process. The details can vary depending on the financial institution of your choice, but here’s a quick breakdown:
- Research and compare accounts: Look for the best high-yield savings account that suits your needs. Focus on the interest rate, minimum balance requirements, and any fees.
- Apply online or in person: Most high-yield savings accounts can be opened online in just a few minutes.
- Fund your account: Transfer money from another account or deposit cash to get started. Don't forget to check if the high-yield interest savings account of your choice requires a minimum balance.
- Set up automatic transfers: If you want to build your savings consistently, set up recurring transfers from your checking account.
Bottom line
A high-yield savings account is a great tool for growing your savings while keeping your money safe and accessible. With higher interest rates and fewer risks compared to other investment options, it’s a flexible way to save for short-term or long-term goals. Just be sure to do your research, compare rates, and choose an account that fits your financial needs and habits.
FAQs
How does a high-yield savings account work?
A high-yield savings account works by offering a higher interest rate compared to traditional savings accounts, helping you grow your money faster. You deposit funds, and they earn interest at a higher APY, all while keeping your money liquid and easily accessible.
How much will $1,000 make in a high-yield savings account?
The exact amount depends on the interest rate, as it fluctuates often. As for October of 2024, if you deposit $1,000 in a high-yield savings account with an APY of 4%, you’d earn about $40 in interest over the course of a year.
What is the downside of a high-yield savings account?
Potential downsides include withdrawal limits, variable interest rates that can change over time, and possible minimum balance requirements to earn the highest rate or avoid fees.
How to find the highest high-yield savings account?
As you do your research on the best high-yield savings account for your needs, your top priority should be the offered rate. But also be careful with potential scams of not-known financial institutions that promise high returns without proper security.
Can you ever lose your money with a high-yield savings account?
As long as the account is FDIC-insured, up to $250,000 of your deposits are protected, meaning you can’t lose your money if the bank fails.
What is the catch of a high-yield savings account?
There isn’t a big catch, but some accounts have withdrawal limits or balance requirements. And of course, you need to make sure you choose a reputable financial institution that is FDIC-insured. Read the fine print to understand any fees or restrictions.
Do millionaires use high-yield savings accounts?
Come back and tell us once you become a millionaire! Jokes aside, this will not be a straightforward answer, as you can imagine. But most millionaires are known for having a diversified investment portfolio, so high-yield savings accounts might easily be one asset in the mix.