What Is A High-Yield Savings Account? (2023)

High-yield savings accounts are accounts that offer substantially higher interest rates than the national average of traditional savings accounts.

Wondering if a high-yield savings account is right for you? Understanding the basics of high-yield savings accounts can help you decide if you should open one.

Annual percentage yields (APYs) and account details are accurate as of Jan. 4, 2023.

What Is a High-Yield Savings Account?

A high-yield savings account is a deposit account—typically offered by online banks and credit unions—offering a much higher interest rate than traditional savings accounts found at brick-and-mortar banks. These accounts pay several times more than the national average of savings accounts, which is 0.30% APY as of December 19, 2022, according to the Federal Deposit Insurance Corporation (FDIC).

Aside from the higher interest rate, high-yield savings accounts work the same as other savings accounts. You deposit money into the account, and, in return, the bank pays you interest. You can make withdrawals as needed, though your bank may charge a fee if you make more than a certain number of withdrawals per month.

You can use high-yield savings accounts for a variety of goals. For example, you might open an account to set aside money for any of the following:

• An emergency fund
• A new or used car
• A down payment on a home
• A wedding
• Vacations
• New furniture
• Education

A high-yield savings account isn’t often a good fit for retirement savings. You’ll likely be better off with a tax-advantaged retirement account or a taxable investment account—either can offer more room for growth. But, overall, high-yield savings accounts can serve more than one purpose as part of your financial plan.

High-Yield Savings Account vs. Traditional Savings Account

High yield savings accounts offer a significantly higher annual percentage yield (APY) than traditional savings accounts. How much difference can earning a higher APY on savings make? Here’s an example.

Let’s say you want to open a savings account with $1,000 and save an additional $100 a month. Bank A offers a traditional savings account paying 0.07%, and Bank B offers a high-yield savings account paying 0.50%.

Over 12 months, Bank A would pay you a “whopping” $1.16 in interest on your initial deposit and monthly contributions. Bank B would pay you $8.27.

Those are still relatively small earnings, but this example illustrates the stark difference between high-interest and traditional savings accounts.

What Interest Rate Can You Earn With a High-Yield Savings Account?

Interest rates vary by institution. The best high-yield savings accounts offer several times the national average rate. It’s possible to find a high-yield savings account paying 0.25% APY to 5.00% APY.

Benefits of High-Yield Savings Accounts

The main benefit of a high-yield savings account is earning a much better APY than you might with another savings option. Rates on these accounts can easily beat rates offered by traditional brick-and-mortar banks. And when interest rates are low, every penny you earn in interest counts.

Aside from that, high-yield savings accounts could save you from paying fees. These accounts are typically offered by online banks, which don’t often charge monthly maintenance fees. That’s because online banks tend to have lower overhead costs than their traditional bank competitors. As such, they can pass that on to their customers in the form of fewer fees and better rates.

How Do High-Yield Savings Accounts Work?

High-yield savings accounts have some things in common with other types of savings accounts:

• Deposits. They allow you to make regular deposits.
• Access. They allow you to access your money via withdrawals or transfers to linked bank accounts.
• Safety. Money held in an account at an FDIC-insured bank is protected up to the legal limits. The current coverage limit is $250,000 per depositor, per account ownership type, per financial institution.
• Transaction limits. Savings accounts may be subject to monthly withdrawal limits. While federal rules restricting savings account owners to six withdrawals per month have been suspended, banks and credit unions can still cap the number of withdrawals you’re allowed to make. And they can charge excess withdrawal fees.

Here’s what sets high-yield savings accounts apart:

• APY. High-yield savings accounts tend to offer higher APYs than accounts found at traditional banks. Online banks typically have lower operating costs compared to brick-and-mortar financial institutions. As a result, they can offer higher interest rates to savers.
• Where you can open them. You’re more likely to find high-yield savings accounts at online banks, credit unions and neobanks (fintechs offering online-based financial services).
• Minimum deposit requirements. Minimum deposit requirements can vary. It’s possible to open high-yield savings accounts with as little as $0 at certain online banks, though some may require you to have $100 or more to get started.
• Monthly fees. You may pay no monthly maintenance fees or minimum balance fees, and there may be no excess withdrawal fees or wire transfer fees. Those features can add to a high-yield savings account’s appeal since you get a higher rate and you’re saving money on fees.

How to Open a High-Yield Savings Account

Opening a high-yield savings account is relatively easy. You’ll choose an account that best fits your needs and then complete the account opening process with the bank.

This is similar to opening any other savings account, except you may be doing it online rather than at a branch. To open a new high-yield savings account, you’ll need to give the bank a few pieces of information, including your:

• Name
• Address
• Email address
• Phone number
• Date of birth
• Social Security number

If you’re opening a joint online high-yield savings account with someone else, you’ll need to provide the same information for them as well.

The institution may ask you to upload a copy of a government-issued photo ID to complete your account opening. Opening a new high-yield savings account typically doesn’t require a credit check. But the bank may run your name and Social Security number through ChexSystems. This consumer credit reporting agency collects information about negative banking activity, including bounced checks or overdrawn accounts.

You can fund your new high-yield savings account once you open the account. You’ll need to link an existing bank account using your account number and routing number to fund the account. You can then schedule an ACH transfer to make your initial deposit.

What to Look For in a High-Yield Savings Account

Consider the following as you compare options:

Initial Deposit

Look at how much money you’ll need to deposit to open a high-yield savings account. You may be able to open your account with no money and fund it later. If you’re just getting started with saving, you may want to choose a bank that lets you open a high-interest savings account with a smaller amount of money.

Minimum Balance

Take note of the minimum balance requirements you may need to meet to earn the stated APY. At some banks, rates are tied to your balance, and other banks may offer the same APY across all balances.

Account Fees

Fees can eat away at the interest you earn on your savings. Check if the account you’re considering charges a monthly maintenance fee, minimum balance fee or other fees. Review the institution’s fee schedule to understand better what the account might cost.

Compounding Frequency

Compounding allows you to earn interest on your interest. When shopping for an account, consider how often the interest compounds, which could be daily, weekly or monthly. The more frequently interest compounds, the more your money can grow over time.

Calculate High-Yield Savings

If you’re stuck trying to decide which account to open or whether it’s worth it, calculating the interest you could potentially earn can help. This is something you can easily do with a savings interest calculator. You can use the calculator to compare interest earnings based on your initial deposit, interest rate, additional contributions, compounding frequency and the number of years you have to save.

Alternatives to High-Yield Savings Accounts

A high-yield savings account isn’t the only place to keep your savings. There are some alternatives you might consider, including:

• Money market accounts
• Certificates of deposit
• Cash management accounts
• Investment accounts

High-Yield Savings vs. Money Market Account

Money market accounts are deposit accounts that combine features of checking and savings accounts. You might earn interest the same way you would with a savings account. But you may also be able to write checks from your account or make purchases using a linked debit card. These are features you typically don’t get with a savings account.

So, which is better, a money market account or high-yield savings?

The answer depends on what you need the account to do for you, how much you’re willing to pay for it and what kind of APY you’re hoping to earn. Money market accounts can offer more flexibility and access to your savings, though you still may be limited to a certain number of withdrawals and transfers per month. On the other hand, high-yield savings accounts could offer better interest rates.

Other High-Yield Savings Account Alternatives

• CDs. The best CDs can pay excellent rates, though you must lock your money in for a certain amount of time. If you withdraw your savings before the CD matures, you could forfeit some or all of the interest earned.
• Cash management accounts. Cash accounts are usually associated with taxable brokerage accounts, and these accounts are designed to hold the money you plan to invest later or receive after selling investments you own. A cash account can function like a checking account and earn interest like a savings account, often at competitive rates.
• Investment accounts. These accounts are designed for investing savings in the financial markets. A brokerage account could yield a substantially better return than a savings account. But you’re taking a higher risk with your money.

Bottom Line

A simple way to decide if a high-interest savings account could work for you is to use a savings calculator to estimate the interest you could earn in a year. Seeing the potential returns could persuade you to open a high-yield savings account.

Frequently Asked Questions (FAQs)