What is a High Yield Savings Account?

High yield savings accounts are similar to standard accounts savings accounts but pay higher interest rates. They are perfect for maintaining an emergency fund or meeting short-term savings goals. If you’re considering opening a high-yield savings account, understanding how it works and what to look for is essential so you can save your money with achievable goals in mind.

What is a High Yield Savings Account?

A High Yield Savings Account is a deposit account that offers a higher interest rate than a traditional savings account, allowing you to earn more on your savings. Some banks may charge monthly maintenance fees or limit the number of withdrawals you can make, but online banks usually offer high-yield accounts with no fees.

The interest rate associated with a high yield savings account is denoted APY, or annual percentage yield. The higher the APY, the faster your money grows. But keep in mind that this is a variable rate and will fluctuate as the Federal Reserve updates its benchmark interest rate. However, with a High Yield Savings Account, you will always earn the highest interest rate on your money. most of today best high yield savings accounts have APYs of at least 2.15%, which is ten times higher than the national savings account average by 0.21%.

How do high yield savings accounts work?

When you put your money in a savings account, you want a competitive return to maximize growth. APY is applied to your High Yield Savings Account balance as compound interest. Compound interest means you will earn interest on your principal balance and the interest it earns, in other words, interest on interest. Your interest will be compounded daily or monthly depending on the terms of your account. The higher the interest rate and the more frequently your interest is compounded, the more money you will earn over time.

A pandemic-era federal law known as the Regulation D now makes it easier for you to access your savings deposits without penalty, as it has eliminated a limit of six monthly withdrawals without penalty. However, your bank may still charge penalties for other types of transfers.

To open a high-yield savings account, you must provide your social security number and contact information, as well as at least one form of identification, such as a driver’s license or passport. For a joint account, anyone wishing to access it must provide this information and this identifier.

The best online banks tend to offer the most competitive returns. Many online banks don’t charge monthly service fees, and some also don’t have minimum balances or opening deposit requirements.

Benefits of a High Yield Savings Account

  • Higher APYs: The interest rate on a high-yield savings account is generally higher than that of a traditional savings account.
  • Security: Money held in an FDIC-insured bank is protected up to $250,000 per depositor, per type of account ownership, per financial institution. FDIC insurance protects your money in the event of bank failure.
  • No monthly fees: Many high-yield savings accounts don’t charge a monthly fee, although some do. Be sure to check the terms and fees of your High Yield Savings Account before opening it to avoid confusion. Keep in mind that some accounts waive monthly fees if you reach a minimum balance.
  • Accessibility: You can access your funds in a high-yield savings account; however, your bank may charge a fee under certain circumstances.
  • Compound interest: Many high-yield savings accounts earn interest daily.

Disadvantages of a High Yield Savings Account

  • Variable interest rate: The interest rate on a High Yield Savings Account is variable, meaning it can change at any time.
  • Higher minimum deposit requirements: Some high yield savings accounts have higher minimum deposit requirements than your regular savings account.
  • Zero risk but limited return: Although many high yield savings accounts offer a variable APY, they are still lower than other financial tools, such as money market accounts.

What should you look for in a high yield savings account?

When choosing a high-yield savings account, consider the following:

APY

You will want the highest possible APY with a high yield savings account. As rates can change at any time, it is good to keep up to date with current rates.

Minimum balance requirements

Some banks set a minimum balance required to earn the stated APY, while others offer the same APY on all balances. Write down any minimum balance requirements to avoid any surprises.

Costs

Monthly maintenance fees and minimum balance fees can eat into your savings. If you’re considering a fee-based account, consider the overall cost and corresponding deadlines to avoid unpleasant surprises.

Alternatives to High Yield Savings Accounts

Several other types of accounts can help you grow your money, including:

  • Money market accounts are similar to savings accounts and checking accounts because you earn interest like a savings account. Nevertheless, you can make purchases linked to a debit card like a checking account.
  • A certificate of deposit, or CD, is a savings account that pays a fixed rate of interest for a fixed term. However, you can only withdraw your money from a CD once it has been in the account for a certain amount of time, called a term.
  • Investment accounts can help you grow your money over time, but they come with more risk. It is important to remember that the money in your savings account is federally insured up to $250,000, while non-deposit investment products are not insured.

The bottom line

Whether you’re looking to build an emergency fund or simply put some money aside, you can invest with peace of mind knowing that high-yield savings offer competitive returns with minimal risk.

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