What is a High Yield Savings Account?

Traditional savings accounts don't earn much interest. The best interest rates are with high-yield savings accounts. Learn more about these online accounts below.

Saving money is hard. It's no wonder that 28% of Americans adults have no savings at all.

If you have extra money to set aside, that's a great sign for your financial health. And it helps if you keep the money in a bank account that earns more than just 0.01% APY.

According to the FDIC, the national average interest rate for savings accounts is currently just 0.04%.^[1] But some savings accounts earn way more that.

They're called high-yield savings accounts, and they can help your cash grow at a faster rate. Find out how they work and how to choose the right one below.

What is a high-yield savings account?

High-yield savings accounts are a type of savings account usually offered by online banks. These accounts typically earn at least 10x as much as the national average. But it's possible for accounts to earn 20x or more than the average.

Interest rates change based on the Federal Reserve's rate. When the Fed lowers its rate, banks lower their rates. When the Fed raises its rate, banks raise theirs too.

Right now, interest rates are relatively low. Some accounts offer 0.50% APY. That's still 12.5x higher than the national average, but it isn't a huge amount. If you have a savings balance of $10,000, you'll get a return of $50 in 1 year instead of $4 with the national average.

Is it still worth it to open a high-yield savings account when rates are low? Absolutely. Once the Fed raises its rate again, you'll be in position to earn more. For example, the same $10,000 balance with 2.00% APY would return $200 in a year. That's a nice chunk of change.

In other aspects, high-yield savings accounts work just like a traditional savings account. Both accounts generally let you make up to 6 withdrawals or transfers per month^[2]. Both are safe and convenient ways to set aside money.

As long as the bank you're working with is FDIC insured, your money will be protected. This means even if the bank closes its doors, your balance will be insured up to $250,000.

How to use a high-yield savings account

High-yield savings accounts are the perfect tool for putting aside money you might need in the near future. Unlike investment or retirement accounts, you can easily dip into a savings account.

Because of the transaction limit on savings accounts, your money won't be as accessible as it would be in a checking account. But this is actually a good thing! The transaction limit ensures you won't withdraw too much from your precious savings.

Here are a few ways you could use your high-yield savings account:

• Build an emergency fund
  
• Save for a home
  
• Save for vacation

To use your funds, you can easily transfer money to your checking account. In the past, most people did their checking and savings with the same bank to make transfers easier. But modern online banks can handle transfers to and from other banks without a problem.

Pros and cons of high-yield savings accounts

High-yield savings accounts (HYSA) are a great way to save for your short-term goals. But that doesn't mean they're perfect. Here's a rundown of the benefits of a HYSA—and why you might not want one:

Pros

• Higher interest rates
  
• Fewer fees compared to traditional banks
  
• Often have low opening deposit requirements
  
• Convenient online access
  
• Rates can increase after opening account

Cons

• No physical branches
  
• Fewer banking services offered
  
• Difficult to deposit cash
  
• Rates dependent on the Fed
  
• Money doesn't grow very quickly

If you need a place to park money you might need within 5 years, a high-yield savings account is a great option. But if you want your money to grow in the long term, try investing your money instead.

Investing can get you a better return on your money. But it's best if you commit to letting your money grow and not touching it.

If you think you'll need to access your money in the near future, a savings account is the way to go. Whatever you do, definitely don't just stuff your money under the mattress. Some interest is definitely better than no interest!

What to look for in a savings account

Online banks are becoming a lot more popular, so you've got a lot of options to choose from. Here are the top features to compare when you're searching for a new high-yield savings account:

• Interest Rate
  Try to look for the highest interest rate you can find to get the most bang for your buck. Savings accounts all work the same for the most part. So APYs are one of the few features that set banks apart.

• Customer Service
  If you've ever been on hold with customer service for hours, you know this one's important. Look up reviews to get a feel for what to expect. But keep in mind that you'll probably find quite a few negative reviews—people with positive experiences rarely feel the need to leave a review.

• Minimum Deposit to Open
  Some accounts don't have a minimum deposit to open an account. Others might require a deposit of $100 or more.

• Minimum Balance Requirement
  Some high-yield savings accounts have a tiered rate system. This means you'll have to maintain a minimum balance to get the highest possible rate. Make sure you either keep enough in your bank account or are okay with the lower rate offered.

• Deposit Methods
  If you often deal with cash or checks, find out how you can deposit your money with the online bank. Find out if the bank has an app for mobile deposits or if it allows you to deposit money from an ATM.

• Access to Funds
  How easy is it to access your money when you need it? All savings accounts will allow for electronic transfers. But some accounts come with an ATM card so you can withdraw cash on the go (though it's rare).

• Fees
  Many online banks have done away with maintenance fees. But this doesn't mean there are absolutely zero fees. Check out the bank's fee schedule so you aren't surprised by any transactional fees.

Best high-yield savings accounts

Online banks have stepped up their game. Many have easy-to-use apps for better access to your savings account. A lot of them also offer checking accounts and other banking products. You could even do all your banking under one roof.

Here are some of the best high-yield savings accounts available right now:

Axos High Yield Savings
Axos offers a range of banking products. Their savings account stands out with a higher APY than most other competitors.

They have a higher minimum to open, but there are no monthly balance requirements after that.

Member FDIC

High Yield Savings - 0.61% APY

• Minimum Deposit Required: $250
• Monthly Fee: $0
• APY: 0.61%

Click Here to Get Deal

Ally Online Savings Account
Ally Bank is known for their good customer service. They have customer care reps available 24/7 by phone. Plus, they have a competitive APY to boot.

Online Savings Account - 0.50% APY

• Minimum Deposit Required: $0
• Monthly Fee: $0
• APY: 0.50%

Click Here to Get Deal

CIT Bank Money Market Account
Money market accounts are very similar to savings accounts. Most money market accounts offer easier access to your money.

CIT Bank offers a competitive APY. All balances earn the same APY, so you don't have to worry about meeting any balance requirements.

Member FDIC

CIT Bank Money Market Account - 0.45% APY

• Minimum Deposit Required: $100
• Monthly Fee: $0
• APY: 0.45%

Click Here to Get Deal

Bottom line

It's always a good idea to set aside some money for a rainy day. You never know when you might get hit with unexpected expenses.

Sure, you could just keep your money in an envelope under your mattress. But your money will actually grow if you stick it in a high-yield savings account. No matter which account you choose, your money will be safe as long as the bank is FDIC insured.

At the end of the day, a savings account is just a tool to help you reach your financial goals. Check out different accounts to see which one works best for you. Most importantly, remember to keep contributing to your savings and take care of your financial health.

References

1. ^ FDIC. Weekly National Rates and Rate Caps. Accessed 5 Mar 2021.
2. ^ Federal Reserve Savings Deposits FAQ