High yield savings accounts provide significantly greater interest rates than the national average of standard savings accounts.
And these high yield savings account rates allow you to deposit any excess money into a bank account with some return while avoiding losing money to inflation.
Although this information could already answer most questions, what more is there to know about a high-yielding savings account? Learn everything you need to know about these accounts. Let’s get to it.
What Is a High-Yield Savings Account?
A high-yield savings account is a bank deposit account that often offers a substantially greater interest rate than regular savings accounts accessible at brick-and-mortar banks. These accounts are primarily offered by internet banks and credit unions.
As indicated by the Federal Deposit Insurance Corporation, these accounts pay many times higher than the national average of deposit accounts, which is now 0.07% APY (FDIC).
High-yield savings accounts function similarly to conventional savings accounts except from the greater interest rate.
You make a deposit into the account, and the bank rewards you by giving you interest. You may withdraw money whenever you need to, but if you take more than a set number each month, your bank can charge you a fee.
There are multiple ways to use a High-yield savings account. Once you open an account, you will be able to save funds for any of the following purposes:
- Emergency funds
- Vehicle purchase (new or used)
- Deposit for a house
- Marriage funding
- Vacation funding
- Furniture
- Education funding
Tip:
Savings for retirement aren’t frequently a suitable fit for a high-yield savings account. With either a taxable investment account or a tax-advantaged retirement account, which both potentially provide greater capacity for growth, you’ll probably be better off. But generally, high-yield savings accounts may contribute to your financial strategy in a number of ways.
High-Yield vs. Traditional
High-yield savings accounts give you a higher annual percentage yield (APY) than regular savings accounts. Here is one example of how a higher APY can impact my savings
For example, say that you wish to create a savings account with a $1,000 deposit and contribute $100 per month to your savings. A standard savings account from Bank A pays 0.07%, whereas a high-yield savings account from Bank B pays 0.50%.
Your initial investment and monthly donations to Bank X would earn you a “whopping” $1.16 in interest over the course of a year. You would receive $8.27 from Bank Y.
Even though there are still rather little gains, this example shows how drastically high-interest and conventional savings accounts differ from one another.
What Are The Benefits?
Earning a significantly higher APY than you might with another savings option is the main advantage of a high-yield savings account. Rates on these accounts can often beat rates given by traditional brick-and-mortar banks.
And every dollar spent on interest matters when borrowing rates are low. High-yield savings accounts may also save you from incurring fees. Online banks often provide these accounts, and these banks don’t frequently impose monthly maintenance costs.
This is due to the fact that online banks frequently have lower overhead expenses than their traditional bank rivals. As a result, they are able to offer lower fees and better rates to their clients.
Opening A High-Yield Savings Account
A high-yield savings account is simple to open. Following account opening with the bank, you’ll select the account that best suits your needs.
Similar to opening any other savings account, with the possible exception that you may be opening it online as opposed to at a branch. You must provide the bank with a few details before opening a new high-yield savings account, including your:
- Name
- Address
- Email address
- Phone number
- Date of birth
- Social Security number
If you’re starting a joint online high-yield savings account with someone else, you must give the same information for them as well. To finalize your account opening, the institution might want you to upload a copy of a picture ID from the government. A credit check is normally not necessary to create a new high-yield savings account.
What Features To Look For
Initial Deposit
Check the deposit amount required to start a high-yield savings account. It could be possible for you to start an account without any funds and add funds later. You might want to pick a bank that allows you to create a high-interest savings account with a lower amount of money if you’re just starting to save.
Maintaining Balance
Note any minimum balance requirements you might have to satisfy in order to receive the specified APY. In certain banks, rates are dependent on your balance, while in others, the APY is the same for all balances.
Fees
The interest you earn on your savings may be reduced by fees. Check to see if the account you’re thinking about has a minimum balance fee, a monthly maintenance fee, or any additional costs. To get a clearer idea of how much the account could cost, review the institution’s pricing schedule.
Compounding Frequency
You may compound interest to earn interest on interest. Think on how often the interest compounds (daily, weekly, or monthly) when choosing an account. Your money might expand over time to a greater extent the more often interest compounds.
Calculating High-Yield Savings
Calculating the interest you could earn might be useful when attempting to select which account to create or whether it is worthwhile. A savings interest calculator makes this task simple to complete. Based on your initial deposit, interest rate, subsequent contributions, frequency of compounding, and the number of years you have to save.
Final Thoughts
With principal protection, the security of government insurance, and a yield that is greater than a standard savings account but lower than you might possibly earn from riskier investments, a high-yield savings account may be a helpful middle ground for your money.
Always consider how one or more high-yield accounts might best support your financial objectives and situation. Then, conduct your research to pick an account that will optimize your earnings while also enabling you to avoid costs and placing unneeded limits.