High-yield savings accounts are a flexible and easy way to earn interest while saving money. They are perfect for short-term savings projects like creating a rainy-day fund, but work just as well for folks who simply want to put their saved cash in a safe and trusted interest-bearing account with the knowledge that they can pretty much access it whenever they need it. Further, savings accounts from online banks can offer higher interest rates than many traditional checking and savings accounts.
However, not all high-yield savings accounts are created equal. Here’s an explanation of these savings tools, with questions to ask before you pick one to match your needs.
What Is A High Yield Savings Account?
A high-yield savings account is a type of savings account that offers a variable interest rate that’s usually higher than rates available from a traditional savings account. But like traditional savings accounts, high-yield savings accounts give you the ability to make deposits and withdrawals.
So what sort of interest are we talking about? As of May 2023, the best interest rates for high-yield savings accounts are available in the range of 4.00 percent annual percentage yield (APY) or higher.1 That’s at least 10 times higher than the national average for savings accounts, which stood at 0.40 percent as of May 2023.2
APY is used to determine the amount of interest you can earn for a savings account over one year. Unlike annual percentage rate (APR), which reflects the simple interest rate over one year, APY includes the effect of compounding. So, with APR, or simple interest, you would only earn interest on the money that you invested in an account each month. But with APY and compounding, you get a two-for-one: interest on both the money you put into the account and the interest that was previously earned on that money. Interest is generally compounded on a daily, monthly, or quarterly basis, depending on the terms of the account. Compared to APR, APY provides a more accurate representation of how much interest your account will earn in a given year.
How Do Online Savings Accounts Work?
To use an online high-yield savings account, you first must apply to open an account with the bank of your choice—ideally one that meets your personal needs. To open an account, you’ll need to fill out an online application and provide required personal information, such as your name, address, and Social Security number. Once approved and the account is opened, you can begin to fund it.
One way to put funds in or transfer funds out of your online savings account is to link the account to another of your checking or savings accounts and transfer funds electronically. Most banks use a test process to confirm that the link between your other account and the new savings accounts is working and secure, often transferring a small deposit back and forth. Some online banks also accept personal checks that are sent by mail.
In addition, you can set up an automatic connection to regularly deposit a set portion of your paycheck—or transfer a specific amount from your checking account—electronically into the savings account.
Once you have funds in your account, interest will be compounded according to your bank’s compounding schedule. Earned interest will then be deposited into your account, typically on a monthly basis. You can continue to deposit funds into your account, or withdraw funds, if and when you’d like—but note that some banks limit the number of withdrawals you can make in a month. Since savings accounts are not meant for everyday spending, you likely won’t receive a debit card or checkbook for your account, but specifics depend on the bank.
Interest-Rate Hikes Mean Better Rates—And Vice Versa
Interest rate increases mean it costs more to borrow, but the rate increases also act as incentive for banks to increase the interest they pay out on savings accounts and CDs.
Conversely, interest rates may also decrease quickly as well. While low rates make it more affordable to borrow money, the APYs on interest bearing accounts, like HYSAs may drop also.
Watch Out for Hidden Fees
One thing to watch for from both online and traditional banks is unexpected fees and restrictions. Check to make sure there are no minimum balance requirements, fees to open accounts, no maintenance fees, wire fees to get money in and out of the account, or fees for paper statements.
FDIC-Insured Savings Accounts
A key point about high-yield savings accounts from banks (along with checking accounts, CDs and money market accounts) is that they are insured by the Federal Deposit Insurance Corp. (FDIC), which covers up to $250,000 per depositor, per account category, per insured bank. Stocks, bonds, mutual funds, annuities, and securities are not protected by FDIC insurance.
Savings Account Security Checklist
A lot of the appeal of savings accounts is that they are a safe and flexible way to park your cash. But safety also involves security, especially with ever-increasingly online attacks on financial institutions. That’s why you want to make sure your savings account provider has protections surrounding your money. Here’s a security check list to use when comparing savings account offerings from different banks and financial institutions:
- Does the provider use multi-factor authentication, through one-time codes when you access your account from an unrecognized device, to prevent unauthorized access?
- Does the provider block unauthorized access by using numerous secure firewalls?
- Does the provider use Secure Socket Layer (SSL) encryption to create a secure connection with your browser when you login in or fill out an application online? This helps protect your personal information.
- Does the provider automatically log you out of your account after a period of inactivity to prevent others from seeing or accessing your online accounts?
- Does the provider guarantee it will not share your user names and passwords with anyone at any time?