How Do High-Yield Savings Accounts Work?

Breaking Down This High-Reward, Low-Risk Saving Option

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You might start to wonder how you can make the most of your money when you realize that you have a few extra dollars in your checking account. Inflation is real and you’ll fall behind if your money isn’t growing. That’s where a savings account comes in. It can offer you interest on your account balance. 

Many believe that high-yield savings accounts are even better than traditional savings accounts because they offer you more in return. But what’s the catch? These accounts offer mostly upsides in most cases, but that's not to say that there aren't a couple of drawbacks.

Key Takeaways

  • High-yield savings accounts offer annual percentage yields (APYs) that are 20 or more times the national average savings rate.  
  • Online-only savings accounts usually offer the highest APYs.
  • Be sure to compare the APYs, deposit requirements, balance requirements, and fees when you're shopping for a high-yield savings account.
  • Alternatives to high-yield savings accounts include CDs, money market accounts, and investing in stocks. 

What Is a High-Yield Savings Account?

A high-yield savings account is one that pays you more interest than a traditional savings account. These traditional accounts offered an average annual percentage yield (APY) of about 0.08%, while the APYs of the best high-yield savings accounts were in the range of 1.00% to 1.85%, according to data collected by The Balance as of mid-2022.

The highest-yield savings accounts are often found at online-only banks.

How High-Yield Savings Accounts Work

The availability of high-yield savings accounts has increased as more companies offer online-only accounts. The lower overhead costs enable higher payouts for account holders. The APY is an important factor to consider, but other account details will also come into play.

Minimum Deposit and Ongoing Balance Requirements 

Some accounts require that you deposit a minimum amount in order to receive the APY that's offered. You might also have to maintain a minimum balance going forward, or not exceed a maximum balance on an ongoing basis.

An account might offer a 0.70% APY for accounts with daily balances between $0 and $10,000, but your APY may drop to 0.45% if your daily balance rises above $10,000.

Monthly Maintenance Fees

Some savings accounts are free of fees, but others come with a monthly maintenance fee. These ultimately take away from any yield you may earn.

Interest Payouts

Interest accrues daily and is paid out monthly in many cases. Affirm calculates interest each day using the daily balance method: 1/365th of your APY multiplied by your balance at the end of each day.

The interest may compound. This means you’ll earn interest on the interest you've already earned. An account with interest compounding daily would earn you an extra 5 cents after the first year ($1,010.05 vs. $1,010), and an extra $5.17 after 10 years ($1,105.17 vs. $1,100) if you have $1,000 in your savings account and a 1% APY.

Simple interest means you only earn interest on the money you've deposited. Compounding interest means your interest will earn interest.

Restrictions on Withdrawals

A federal law known as Regulation D normally limits savings accounts to a maximum of six transfers or withdrawals per account statement cycle, although this aspect of the rule was suspended during the start of the COVID-19 pandemic.

You could face account closure or fees if you try to exceed the six-transaction limit when the Regulation D maximum transfer/withdrawal rule is in effect. And some banks may still have this requirement in place, although it isn't mandated by law as of July 2022.

Examples of High-Yield Accounts

The Balance tracks rates offered by more than 150 banks and credit unions, along with their balance requirements and fees. You can see examples of high-yield accounts being offered if you look at the best savings account interest rates.

How To Open a High-Interest Savings Account

Here's what to expect during the sign-up process after you find the right high-yield savings account for you. You’ll have your new savings account and can start earning after your information has been verified.

Set Up an Account

Most high-yield accounts will be online-based, so start by creating an online account with the banking institution. This process typically requires your name, email address, password, and phone number. Most companies will send a verification code to your mobile device that you must use to confirm your identity.

You may also have to agree to an electronic communication disclosure information and consent form.

Provide Personal Identifying Information

Federal law requires that financial institutions verify your identity when you're opening an account, so you'll have to provide some combination of information. This might include your Social Security number, date of birth, residential address, and existing bank account information.

Your credit report may also be checked as part of the verification process, but it’s often a soft inquiry so it won’t impact your credit score.

What To Look for in a High-Yield Savings Account

Of course, you'll want to look for an institution with a competitive APY, suitable balance and deposit requirements, low fees, and a good reputation with past account holders. But also consider the value of your time. Ease of banking should be a contributing factor to your choice of a high-yield savings account as well. Look for a bank that allows you to link your high-yield account to your other accounts, such as checking, other savings, or even brokerage accounts.

Pros and Cons of High-Yield Savings Accounts

As with any product, there are both advantages and disadvantages to high-yield savings accounts.

Pros
  • Money is safer than it would be in an investment account

  • You'll earn more interest than you would with a traditional savings account

Cons
  • May not be suitable for saving for long-term goals

  • You may hit some obstacles withdrawing your money when you need it

Pros Explained

  • Your money is safer: You may earn a better return on your investments if you put your money in the stock market, but the Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000 per depositor. Your savings are safe if the bank fails. This isn't the case with investment accounts.
  • You'll earn more interest: Your money will earn more in this type of account than it would in a traditional savings vehicle, without many of the restrictions imposed by some other higher-interest savings options.

Cons Explained

  • Not suitable for long-term goals: Yes, these accounts pay a higher interest rate, but they won't give you the same return on your money as a 401(k) or IRA if you're saving for retirement.
  • Obstacles withdrawing your money: You'll be limited to six withdrawals a month when this provision of Regulation D returns, and some banks haven't backed off this rule even after the repeal of this federal law. Banks can set their own limits and requirements. There might be limits or waiting periods to make transfers to and from your other accounts as well.

Alternatives to High-Yield Savings Accounts

You have some other options that can also help you earn interest while keeping your funds relatively liquid if you're not sure that a high-yield savings account is the best option for you.

Money Market Accounts

Money market accounts (MMAs) are similar to high-yield savings accounts in that they offer APYs that are much higher than a traditional savings account. They have variable rates that fluctuate with the market. One key difference is that MMAs often have higher deposit and ongoing balance requirements.

MMAs are also limited to six withdrawal or transfer transactions per month when this provision of Regulation D is in effect or if the banking institution elects to impose this rule.

Certificates of Deposit

You can deposit a required amount into a certificate of deposit (CD) and leave it for a specified time to earn a profitable return. You'll often have to pay an early withdrawal fee if you withdraw your money before the term is over. This can reduce or offset any earnings.

CD term lengths can range from three to 60 months or even to 120 months. The longer the term, the higher the APY. CDs can be a good option if you're sure you won’t need access to your money for some time.

Certificate of deposit APYs don’t typically begin to outperform many high-yield savings accounts until you get into the 18-month or longer terms.

Stocks

Investing in the stock market is an option that dangles the carrot of much higher returns than any type of savings account can offer, but stocks come with higher risk. You can earn up to an average of 10% in annual returns by investing in stocks over the long term, but nothing is guaranteed. Consider enlisting the help of a trusted advisor before you take this route.

Choosing an Account That’s Right for You

A high-yield savings account is often very easy to set up online and you can start earning interest right away. Shop around to get the best returns.

Keep in mind that rates can fluctuate over time with the market. You can move your savings to another bank if you find that the rate at your existing bank becomes less competitive over time. Institutions know this, so many try to remain as competitive as possible.

Frequently Asked Questions (FAQs)

What is the difference between a high-yield savings account and a CD account?

Both CD and high-yield savings accounts can help you earn returns on your money, but CD accounts require that you leave your money in the account for a certain number of months or even years to earn the return. High-yield savings accounts don’t have a time requirement. You earn the APY based on how much money is in the account, but they may pay lower rates than CDs because of this flexibility.

Can you get a high-yield savings account without a credit check?

A savings account is a low-risk financial account. The company isn't lending you money, so it often won’t have any strict credit eligibility requirements. Many financial institutions will run a soft credit check as part of their identity verification process, however. They may also check your report with ChexSystems, which contains information on your closed checking and savings accounts.

How often can banks change the interest rate on my savings account?

Most savings accounts have variable rates, so the APY can go up and down as often as the bank wants to change it. Fluctuations will be in response to changes in the federal funds rate in most cases, which depend on market conditions.

Article Sources

  1. Federal Deposit Insurance Corporation. “National Rates and Rate Caps.”

  2. Capital One. ”Why Do Banks Pay Interest?

  3. Board of Governors of the Federal Reserve System. "Federal Reserve Board Announces Interim Final Rule to Delete the Six-Per-Month Limit on Convenient Transfers From the 'Savings Deposit' Definition in Regulation D."

  4. Federal Deposit Insurance Corporation. "Your Insured Deposits."

  5. Consumer Financial Protection Bureau. "What Is a Money Market Account?"