High-yield savings accounts are accounts that can be used to maximize your earning potential through savings accounts. However, they often come with more strict requirements.
What are High-Yield Savings Accounts?
High-yield or high-interest savings accounts are ones that have notably higher APY, or annual percentage yield. This means that by leaving your money in a high-yield account, you’ll earn significantly more in interest. High-yield rates can often be upwards of 20 times the interest earned by traditional savings accounts, based on national averages from the FDIC.
Annual percentage yield is more accurate than the base interest rate because it takes compounding interest into account and will be closer to your actual rate of return.
Let’s look at an example. Say you have $10,000 to put in a savings account for a duration of one year. Assuming there are no dealbreakers or blockers based on bank requirements or policies, here’s how your money would fare in a normal savings account vs. a high-yield account.
| Standard Savings Account | High-Yield Savings Account | |
|---|---|---|
| APY | 0.7% (reasonable based on national averages) | 1.75% |
| Interest Earned | $7 | $175 |
| Ending Balance | $10,007 | $10,175 |
Not only would you earn $168 in a high-yield savings account within the year, but those additional funds would also continue to earn interest in years to come.
How Do High-Yield Savings Accounts Work?
It may seem like a no-brainer to choose a high-yield savings account when looking exclusively at APY rates. However, understanding how institutions that offer high-interest accounts operate will highlight some of the tradeoffs that these accounts carry.
Usually, high-yield savings accounts are just that and nothing more. Unlike many modern financial institutions that offer a plethora of account options and products, higher interest accounts may have limited features.
This may require you to rely on online bank transfers to access your funds, which may be ideal in some cases as opposed to a debit card or checks.
Are High-Yield Savings Accounts Safe?
High-yield savings accounts follow the same federal guidelines as traditional savings accounts. As long as your account is opened through an FDIC-insured bank, your funds are protected up to $250,000.
High-Yield vs. Standard Savings Accounts (Venn Diagram)
Comparing the similarities and differences between average savings accounts vs. high-yield accounts can help highlight the pros and cons of each. Applying these pros and cons to your personal financial situation can help you determine if moving to an account with a higher APY is the right decision for you.
| Standard Savings | Both | High-Yield Savings |
|---|---|---|
| Additional bank features like linked checking accounts, checks, debit cards, and ATM accessibility | FDIC Insured | Higher Annual Percentage Yield (APY) |
| Ability to house multiple accounts within a single bank or credit union | Banking with multiple financial institutions for additional checking or savings accounts | |
| In-person access for deposits and customer service | Typically allow for online and mobile banking | Often exclusively online banking services |
| Typically have low minimum balance and initial deposit requirements | Often have higher minimum balance and initial deposit requirements | |
| Usually don’t carry monthly maintenance fees | Occasionally have an associated monthly maintenance fee |
What to Look for When Choosing a High Interest Savings Account
Choosing the right savings account, high-yield or not, warrants doing your research and comparing various options. A lot of this decision will ultimately come down to three things: earning potential, personal preferences, and eligibility based on the account requirements.
Earning Potential
One of the obvious reasons for considering opening a high interest savings account is to earn more in interest. Here are some things to review for these accounts that can impact your earning potential.
- Interest Rate – This is the base interest rate that does not consider compounding.
- Annual Percentage Yield (APY) – This rate is adjusted to account for the bank’s compounding interest and will give a clearer idea of how much you’ll earn in interest.
- Compounding Schedule – Banks can compound interest daily, monthly, quarterly, semiannually, or annually. More frequent compounding will increase the amount of interest earned. However, being that compounding interest is considered with APY rates, you won’t need to calculate this out yourself for every comparison.
Personal Benefits
Don’t discount your personal preferences as a decision-making factor when it comes to savings accounts. You should allow yourself to be able to manage your finances comfortably. If you find a great account, but it isn’t quite your “ideal state”, consider it as a secondary savings account to maximize your interest earned without hindering your preferences in your saving techniques.
Here are some things to consider when comparing accounts:
- Accessibility to funds, in person and/or online
- Account linking to existing accounts at the same or different institutions
- Round-ups and rewards to increase your earning potential (beware of increased spending temptation)
- Deposit options for checks, cash, recurring direct deposits, and electronic deposits or transfers
- Sign-up bonus or promotions for opening the account
- Mobile app and bank website usability and functionality
Requirements of High APY Accounts
High-yield savings accounts may come with more strict requirements than traditional savings. Once you’ve located some accounts to compare, review the following for each so you don’t end up with any unpleasant surprises.
- Initial Deposit
- Minimum Maintained Balance
- Fees & Penalties
- Activity Requirements
Opening A High-Yield Savings Account Online or In Person
The process of opening a high-yield savings account is extremely similar to any standard savings account. You’ll need all of the required personal information such as your full name, address, date of birth, and social security number.
If your current bank or credit union happens to offer a high-yield account option that you’ve decided on, you can likely open an account very simply through the institution’s website or app. This expedites the process because much of your personal information has already been provided.
If you’re opening an account through a new bank, which is more likely, a little extra time will be required for verifying your information. However, this process is still usually very simple. It can be done online in many cases through the bank’s website, or in person if there is a branch local to you.
Why High-Yield Rates Fluctuate
Interest rates on high-yield savings accounts are variable, or changing over time. The federal funds rate, set by the Federal Reserve, is the rate at which financial institutions are lending money to each other. The federal funds rate typically fluctuates in relation to the nation’s economy. This influences the rates that banks are able to offer to consumers for high-yield and other types of savings accounts.
Your account’s interest rate is directly related to the federal funds rate. Meaning, when the federal funds rate goes up, so does your APY and vice versa.
Will My Interest Rate Change After My Account is Already Opened?
Yes, your rate will fluctuate with changes in the economy even after your account has been opened. Opening a savings account does not lock in your rate at that time. This, of course, could be either good or bad, depending on the movement of these rates.
However, the good news is that these rates are regulated for a reason and it’ll be likely that most banks will follow a similar pattern during times of upward or downward movement in the going rates.
In addition to the current rate of an account when shopping around, try to choose a bank that has historically competitive rates so you’ll see an advantage to your account even in down times.