High yield savings accounts offer much higher interest rates than traditional savings accounts.
Are you considering whether or not a high-yield savings account is a good choice for you? If you are looking to open a high-yield savings account, it is important to understand the basics. This can help you determine whether or not it is the right choice for you.
This text was accurate as of September 22, 2022.
High-Yield Savings Account
A high-yield savings account is a savings account that has a higher interest rate than a traditional savings account.
Savings accounts that offer high interest rates are paying several times more than the national average, which is currently 0.07% APY, according to the Federal Deposit Insurance Corporation (FDIC).
Aside from the higher interest rate, high-yield savings accounts work in the same way as other savings accounts. In return for depositing money into an account, the bank pays the customer interest.
You are able to take money out as you please, but your bank could penalize you with a fee if you exceed a certain number of withdrawals in one month.
High-yield savings accounts can help you reach a variety of financial 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
High-yield savings accounts are generally not a good idea for retirement savings. A tax-advantaged retirement account or a taxable investment account will likely offer more room for growth than other options.
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
This means that you can earn more money with a high yield savings account than you can with a traditional savings account. How much of a difference can earning a higher annual percentage yield (APY) on savings make? Here’s an example.
At the end of the year, you will have saved $1,200. Opening a savings account with $1,000 and adding $100 to it each month will give you a total of $1,200 saved by the end of the year. Which bank offers the better deal? Bank B offers a better deal than Bank A.
Bank A would pay you $1.16 in interest on your initial deposit and monthly contributions over the course of 12 months. Bank B would pay you $8.27.
The difference between high-interest and traditional savings accounts is illustrated by the earnings in this example.
Who Typically Offers High-Yield Savings Accounts
A high-yield savings account is a type of savings account that offers a higher interest rate than a standard savings account. You may be able to find a high-yield savings account at the same bank where you conduct your traditional banking. Typically, high-yield savings accounts are offered by internet-only banks.
Most people open up a savings account with the same bank that they already have a checking account with. This is usually for convenience, since it’s easy to transfer money between accounts when necessary.
Although you cannot keep your checking account with your regular bank and open a high-yield savings account with an online-only bank, you can set up electronic transfers between the two accounts to take advantage of the higher percentage yield of the high-yield savings account while still simplifying the process of moving your money.
The fund transfer process may take longer than it would with a traditional bank, since the money is being moved between different institutions.
Interest Rate With a High-Yield Savings Account
Interest rates vary by institution. The best high-yield savings accounts offer interest rates that are several times the national average rate. It is possible to find a high yield savings account that pays APY from 0.25% to 5.00%.
Uses for a High-Yield Savings Account
Personal Finance
plan. Many experts advise that the fund should be a cash reserve totaling three to six months of your income that you can tap into in case of a financial emergency, such as finding yourself unemployed.
Benefits of High-Yield Savings Accounts
If you open a high-yield savings account, you can expect to earn a much better Annual Percentage Yield (APY) than you would with another type of savings account.
This is because high-yield savings accounts typically offer higher interest rates. The rates offered on these accounts are much better than the rates offered by traditional banks. If interest rates are low, the interest you earn will be minimal.
In addition to that, high-yield savings accounts could help you avoid paying fees. Many online banks don’t charge monthly fees for their accounts.
Since online banks have less expensive overhead costs than traditional banks, they can offer lower prices. This means that banks can charge their customers fewer fees and offer them better rates.
High-Yield Savings Accounts
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 give you the ability to take your money out through withdrawals or transfers to accounts that are connected to your bank.
Safety
FDIC-insured banks protect your money up to the legal limits. The amount of money that each depositor is covered for is $250,000 per account ownership type at each financial institution.
Transaction limits
Savings accounts may be subject to monthly withdrawal limits. Even though federal rules that limit savings account owners to six withdrawals per month have been lifted, banks and credit unions can still set their own limits on 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
Majority of the time, high-yield savings accounts will have a higher Annual Percentage Yield (APY) in comparison to what traditional banks offer. This means they can offer higher interest rates on savings accounts and lower rates on loans.
Brick-and-mortar financial institutions have higher operating costs, which means they generally offer lower interest rates on savings accounts and higher rates on loans. This means that savers can get a better return on their money.
Where you can open them
The highest yielding savings account are more often found at online banks, credit unions, and neobanks.
Minimum deposit requirements
Minimum deposit requirements can vary. It is possible to open a high-yield savings account online with no money, though some online banks may require that you have $100 or more to start.
Monthly fees
There are no monthly maintenance fees or minimum balance fees, and no excess withdrawal fees or wire transfer fees. The appealing features of a high-yield savings account are the higher interest rate and lack of fees.
Opening a High Yield Savings Account
Opening a high-yield savings account is relatively easy. After you decide which account is right for you, follow the steps to open an account with the bank.
You can open a savings account online just like you would at a brick-and-mortar bank. The only difference is that you’ll be doing it from your computer instead of inside a physical bank 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 are opening a high yield savings account online with someone else, you will need to provide the same information for them as well.
The organization might request that you transfer a picture of a government-provided photo ID to finish your record enrollment. You usually don’t need to do a credit check to open a new high-yield savings account.
The bank may use ChexSystems to check your name and Social Security number. This consumer credit reporting agency collects information about individuals who have exhibited negative banking activity, including bounced checks or overdrawn accounts.
You must open the account before you can fund it. You will need to connect a bank account that you already have by using the account number and routing number in order to provide money for the new account. After you open an account, you can schedule an automatic bank transfer (ACH) to make your first deposit.
What To Look for in a High-Yield Savings Account
Consider the following as you compare options:
Initial Deposit
You will need to deposit a certain amount of money to open a high-yield savings account. You can open an account without any money and fund it at a later time.
This text is saying that if you are just starting to save money, you should choose a bank that offers a high-interest savings account. This account can be opened with a smaller amount of money.
Minimum Balance
Be aware of the minimum amount of money you will need to have in your account to earn the APY that is advertised. Some banks offer different APYs depending on the amount of money in your account, while others offer the same APY regardless of balance.
Account Fees
If you’re not careful, the fees associated with your savings account can eat into the interest you earn, leaving you with less money than you started with. Look for any fees that may be charged on the account you are thinking about opening.
This may include monthly maintenance fees, minimum balance fees, or other charges. The institution’s fees will give you a better idea of how much the account will cost.
Compounding Frequency
Compounding allows you to earn interest on your interest. When you are looking for an account, think about how often the interest will be added, which could be every day, every week, or every month. The more often you compound your interest, the more your money can grow over time.
It is important to understand how often your bank is compounded your interest. The rate at which your deposit earns interest can be affected by how often the interest is compounded. More frequent compounding may result in a higher return.
If you evaluate the Annual Percentage Yield instead of the interest rate, this will simplify the math regardless of how often the bank compounds your interest.
If inflation is higher than the APY on your savings account, you can lose money.
If you plan on saving with an internet-only bank, double check that your deposit is protected by either the FDIC or the National Credit Union Administration.
Your assets are protected up to $250,000 if an FDIC- or NCUA-insured institution fails. This applies whether you have an account with a traditional or online-only bank.
Some companies offer high-yield savings accounts in partnership with FDIC-insured banks. This provides FDIC insurance coverage on your deposits.
Best High-Yield Savings Accounts Available
The APYs of the best high-yield savings accounts can vary from month to month, and are affected by a number of market conditions.
When looking for a high-yield savings account, it is beneficial to find one with the latest bargains or incentives. New customers are sometimes given a much higher rate if they agree to certain terms and conditions.
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