What Is a High-Yield Savings Account?

What Is a High-Yield Savings Account?

A high-yield savings account is a type of savings account that can pay up to 10 to 12 times the national average of a standard savings account.

Traditionally, people have held a savings account at the same bank where they hold their checking account for easy transfers. But with the rise of online banks and as more traditional banks use online accounts, the competition on savings rates has skyrocketed, creating a new category of "high-yield savings accounts."

High-Yield Savings Differences

The difference in interest between high-yield savings account rates and the national average is significant. If you're holding $5,000 in a conventional savings account, for instance, and the national average rate is 0.39% annual percentage yield (APY), you would earn $19.50 over the course of a year. If you instead put that same $5,000 in an account earning 4.5%, you'd earn $225 in interest.

To earn significantly more in interest with your savings, you may need to hold your savings account at one institution and your checking account at another. Today's availability of electronic transfers between institutions—and the speed at which those transfers can be executed—make moving money between a checking account and savings account relatively simple, no matter if they are held at different banks.

Unlike traditional brick-and-mortar institutions that offer a one-stop shop for all your banking needs, banks offering high-yield savings accounts typically limit their features or offer few or no other products. Many don't offer checking accounts and few provide ATM cards. Generally, withdrawals and deposits are made by electronic bank transfer or mobile check deposit.

One important feature is the same between traditional savings accounts and their high-yield counterparts: the federal insurance you're provided against bank failures from the Federal Deposit Insurance Corp. (FDIC) and credit union failures from the National Credit Union Association (NCUA). Your deposits are protected for up to $250,000 per account.

How to Use a High-Yield Savings Account

A high-yield savings account will likely comprise only a part of your overall financial portfolio. Consider how you'll best use the account in tandem with other accounts to fit your broader investment strategy. Determine how much cash to set aside according to your goals and budget. For instance, if your savings account is serving as an emergency fund, consider having at least three to six months' worth of living expenses deposited.

The strategy may be different if you're using a high-yield account to save up for a large purchase, such as a house, a car, or a vacation. In that case, you may want to use a high-paying savings account to help you protect your principal while applying interest earnings to your savings goal.

You may simply want to open a high-yield savings account to keep cash. Most checking accounts don't pay any interest, and those that do generally offer very low interest rates, so moving extra funds into savings when you don't need them can provide a higher monthly interest payment. One thing to remember is that your interest earnings will be taxed each year.

Many banks allow you to open more than one savings account and even give them personalized nicknames (e.g., Car Fund, Hawaii Vacation, etc.). Or you can open a high-yield savings account at more than one top-paying institution.

What To Look for in a High-Yield Savings Account

Whether you're shopping for a high-yield account at a new bank or opening one at your current bank, compare options across the marketplace. Differences in interest rates and fees can add up over time, especially if you're keeping a relatively large balance in savings. Here's what to look for and compare:

1. Interest Rate

How much interest does the account currently pay? Is it a standard rate or an introductory promotional rate?

Savings account rates are generally flexible and can be changed at any time. But some accounts will specify that the currently advertised rate is only available for an initial period of time. Another factor to look for is whether there are minimum or maximum balance thresholds for earning the promoted rate.

2. Required Initial Deposit

How much money is required to open the account? Do you want to deposit the minimum deposit requirement?

3. Minimum Balance Required

How much money are you required to keep in the account? Falling below the minimum deposit requirement can result in fees, which can offset the interest rate earnings.

4. Fees

Does the bank or credit union charge any fees on this account? If so, what are the ways you can avoid them (e.g., always keeping your balance above the minimum threshold)?

5. Links to Other Banks and/or Brokerage Accounts

Will the bank allow you to create links between your high-yield savings account and deposit accounts at other banks or brokerage firms? Are there restrictions on linking multiple accounts or is there a waiting period for new accounts?

6. Accessing Your Money

What additional options, if any, are available for withdrawing funds? Can you withdraw funds from savings using an ATM card?

7. Deposit Options

If you'll want to deposit checks into the account, does the bank have a smartphone app that offers mobile check deposit? Otherwise, will you be able to mail in checks or deposit them by ATM?

8. Compounding Method

Banks can compound interest daily, monthly, quarterly, semiannually, or annually. More frequent compounding will theoretically increase your take-home yield. If you compare accounts by APY instead of annual interest rate, the compounding factor will already have been taken into account.

How to Open a High-Yield Savings Account

If your bank offers a competitive high-yield savings account, it should be easy to open a new account. It will likely be possible with little need to enter personal information because you already will be verified with the institution.

If you're opening a savings account at a new institution, the process will be more involved, but should still be simple. Almost all high-yield savings accounts can be opened online. You will likely need to fill in an electronic application with key personal information. Have your driver's license, Social Security number, and primary bank account information on hand.

The Bottom Line 

A high-yield savings account can be an ideal place to keep money you are not using in the short term but that you want fairly easy access to. It offers higher returns than a traditional savings account and is low risk because your deposits are federally insured up to $250,000. Consider the pros and cons of high-yield savings accounts compared to your other options, such as investment accounts. Then, compare the terms of different accounts to find one that best suits your goals and personal situation.