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How Does A High-Yield Savings Account Work?

Dayana Yochim  |  July 10, 2024

Parking your money in a high-yield savings account can help It grow faster. But how do they work exactly?

When high-yield online savings accounts came along, the appeal of standard savings accounts offered by brick-and-mortar banks came crumbling down. Traditional banks simply couldn’t compete with the competitive interest rates savers could earn at digital upstarts.

What is a high-yield savings account exactly? And how does a high-yield savings account work? Read on for all you need to know.

What is a high-yield savings account?

A high-yield savings account is a bank account that pays a higher rate of interest on your deposits than you’d get in a traditional savings account. High-yield accounts (aka high-interest online savings accounts) exist mostly online-only, which requires making some administrative adjustments, depending on how you want to use the account. They are best for money you don’t need to frequently access. Think an emergency fund, near-term savings (for down payments, big purchases, tuition) and not long-term savings (anything over three or five years) or everyday spending money. 

How does a high-yield savings account work?

How does a high-yield savings account work exactly? Well, much like a traditional bank savings account. You deposit money and the bank pays you interest on the money you deposit. But the terms and logistics vary in three main ways:

High-yield savings accounts vs. traditional savings accounts

  1. They pay more in interest: The interest you earn is higher because high-yield savings accounts are offered mainly through internet-only banks, credit unions and the online banking arms of traditional banks. Because they don’t have to pay for physical branches, tellers, printed market materials and other worldly trappings, they can afford to pay customers higher rates.
  2. Withdrawals are limited: High-yield savings accounts typically have similar withdrawal and transfer limits to traditional savings accounts. Under federal law, high-yield savings account customers are allowed up to six no-fee withdrawals or transfers out a month. That said, the Fed currently allows customers to make unlimited withdrawals
  3. Transactions may require more steps: For example, if you want to deposit a physical check, there is no teller. You may be able to use an ATM if the online bank is part of a broader network. Or you may have to mail it in, use the bank’s app (to take a picture) or deposit the money first in a different linked account and transfer the money after it clears to your high-yield online savings account. 

Are high-yield savings accounts worth it?

If you’re OK with the limitations of high-yield savings accounts that are mentioned above, then yes. According to the FDIC, the national average rate on savings accounts is currently around .45%. Plenty of accounts pay even less than that. In comparison, we’re seeing high-yield online savings accounts that pay APYs of 4.50% to 5.55%, even from the big banks like American Express and Marcus by Goldman Sachs. 

When rate shopping, compare APY, which takes into account how frequently interest is compounded.

Let’s math this:

Forbright Bank (a top pick in the high-yield savings category by recently advertised a 5.30% APY, requiring no minimum deposit. Keep a $5,000 balance in the account for a year, you’ll earn around $271 in interest, versus around $22 in the traditional savings account. 

Does the interest rate fluctuate? 

Yes. Interest rates on high-yield savings accounts can go up or down 1) based on changes in the Federal Reserve’s benchmark rates; 2) when a bank changes its rates, and 3) when a promotional rate expires. If you want to earn a guaranteed interest rate on your savings, a Certificate of Deposit (CD) is the way to go. 

Can you lose money in a high-interest account?

Your money is safe as long as the bank is a member of the Federal Deposit Insurance Corporation (FDIC) or, if it’s a credit union, the National Credit Union Association (NCUA). These regulators provide up to $250,000 of coverage per depositor, per institution and per ownership category (or account type). If you have a high-yield savings account in your own name, and a joint account at the same institution, your coverage is $500,000 ($250,000 for each account) and the other co-owner of the joint account is also covered up to $250,000. 

How do I pick the best high-yield savings account?

Now that we’ve answered the question “How does a high-yield savings account work?,” it’s time to figure out how to pick the one that’s right for you. Here are six high-yield savings account features to compare:

  1. Interest rate: How much will your money earn if you park it at a particular bank? When rate shopping, compare APY (annual percentage yield), which takes into account how frequently interest is compounded (e.g. daily, monthly, etc.). Also note if you’re seeing a temporary promotional rate or simply the current going rate. Riding the wave of a promotional rate or getting a short-term bonus to nab extra dollars is a fine strategy. Just make sure you play by the rules so you don’t end up sacrificing the extra money you earned. 
  2. Minimum initial deposit: This is how much you need to open an account. If you’re trying to build your savings, start with an account that requires a low minimum, and add to it. Try not to dip below this amount or you might forfeit some of the interest you’ve earned or get hit with a low-balance fee. After you’ve amassed your savings fortune, you can transfer to another account or institution that offers better terms.
  3. Minimum balance requirement: Some banks require a minimum ongoing account balance to remain eligible for the advertised interest rate. You may also come across providers offering tiered interest rates: The higher the account balance, the higher the APY. Let that be an incentive to build your savings.
  4. Fees: Does the bank charge monthly service fees? Does it reimburse ATM fees? Read the fee schedule carefully. Steering clear of pesky fees is usually a matter of following the rules (and reading the fine print on updated terms sent to customers). 
  5. Accessibility: Think about how you’re going to use an account before you open it. Will you need access to cash — look at the bank’s ATM network, if it has one — or will electronic transfers do? Is the bank able to link your high-yield account to your other providers, or will you have to jump through a few hoops? 
  6. Deposit procedures: How do you get money into the account? Do you have to mail in checks? Is there a mobile app? Can you use an ATM? One workaround is to deposit checks into a linked account and electronically transfer funds into your high-yield savings account. If the idea is to build up a balance in your high-yield savings account, look for a provider that supports automated monthly or weekly transfers.  


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