What Is a High-Yield Savings Account?

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Whether starting an emergency fund or just planning for retirement, how you save is almost as important as why you save. One of the simplest and safest ways to let your money earn more is by opening a high-yield savings account. But what is a high-yield savings account and how does it work? Keep reading to learn more.

What Is a High-Yield Savings Account?

A high-yield savings account definition is simply this: It’s a savings vehicle that allows you to earn better-than-average interest rates on your deposited funds. As the name suggests, a high-yield savings account is considered a high-interest savings account. This type of savings account gives you much more bang for the buck as the interest earned is higher than the national average for a standard savings account.

You can find high-yield savings accounts at all types of financial institutions, including traditional banks, online banks and credit unions. But online banks tend to have the best rates because they have lower overhead than other financial institutions, allowing them to offer higher APY on their accounts. Keep this in mind when looking to open an account.

How Does a High-Yield Savings Account Work? 

If you have a traditional savings account, you can expect a high-yield one to work the same way. But here are some things to know about how savings accounts work, from how you earn interest to how often you can withdraw your funds.

Interest

Three primary factors determine the amount of interest you earn with a high-yield savings account:

• Your account balance
• The account interest rate
• How often interest is compounded

Banks may compound interest as often as every day or as little as once per year. However, the interest on high-yield accounts typically compounds more frequently than traditional savings accounts.

Account Requirements

Some high-yield accounts have balance or other account requirements you must maintain to earn the high-yield APY and to avoid a monthly account maintenance fee. Other banks may only apply the higher APY to a maximum balance, such as the first $5,000, and then apply a lower APY to any remaining balance.

Fees

A high-yield account may have fees, from monthly maintenance fees to excessive withdrawal fees. However, many banks now offer fee-free accounts or enable you to avoid fees by meeting specific account requirements.

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Account Access

A high-yield account may come with an ATM card for account access. However, if you choose a financial institution that doesn’t provide one, you can transfer funds to a checking or other deposit account or withdraw funds at a physical branch if the account isn’t with an online bank.

Withdraw Limits

Savings accounts are designed to encourage savings, so you can often make as many monthly deposits or transfers into your account as needed. However, some financial institutions limit the number of some types of monthly withdrawals you can make. These banks may charge fees for excessive withdrawals, transfer your money to a checking account or close your account if you continually exceed your monthly limit. 

ATM and in-branch transfers or withdrawals typically don’t count toward your monthly withdrawal limit. But all other types of transfers and debit card transactions may count.

Pros and Cons of High-Yield Savings Accounts

Before putting your money into a high-yield savings account, you should weigh the pros and cons to determine if it’s the best place for your money. If you’re saving for a specific financial goal, a high-yield savings account might make sense, or another investment option may help you reach your goal faster.

Pros

High-yield savings accounts are ideal for an emergency fund or saving for short-term goals. Here’s why:

• High-interest rates: Thanks to a high-interest rate, your money can grow much faster in a high-yield savings account than in a regular savings account, which means you reach your goal more quickly.
• Accessibility: High-yield savings accounts provide relatively easy access to your money, unlike other investments such as stocks or CDs. This quick access is beneficial when an unexpected expense arises or if you’ve reached your goal and need your money immediately.
• No or low fees: It’s easy to find high-yield savings accounts with low or no monthly maintenance fees or simple account requirements for avoiding fees.
• No risk: Funds in high-yield savings accounts are typically insured by the Federal Deposit Insurance Corporation, or the National Credit Union Administration in the case of credit union accounts, making them a safe place to keep your money. Additionally, while savings account rates can drop, you can’t lose your investment.
• Protection against inflation: The earnings on some high-yield savings accounts may protect the purchasing power of your money from inflation. But know this is not true of all high-yield savings rates.

Cons

Carefully consider these cons before determining whether a high-yield savings account is the best vehicle for your money:

• Variable interest rate: The interest rates on high-yield savings accounts are variable, unlike the fixed rates of CDs, and can change at any time, potentially leading to lower returns.
• Transaction limits: Some financial institutions may limit the number of certain types of transactions you can make each month and may charge fees for exceeding the limit.
• Minimum balance requirements: Some high-yield savings accounts may require a significant balance to open the account or earn the higher APY.
• Opportunity cost: While high-yield savings accounts offer higher interest rates than regular savings accounts, there are other investment options, such as stocks or bonds, that could potentially provide higher returns, albeit with higher risk.
• Potential fees: While many high-yield savings accounts have low or no fees, it’s essential to read the fine print before opening a new account to determine any fees that could negate your earnings.

Choosing a High-Yield Savings Account

The main thing to consider before opening a high-yield savings account is whether it meets your personal financial needs. You’ll also be looking for an account that offers a high-interest rate. Otherwise, it defeats the purpose of looking for a high-yield savings account in the first place. Beyond that, you should ask the following questions about any account you’re considering:

• Is the account federally insured? The best way to protect your money is to find a high-yield savings account at a bank or credit union that is protected by the FDIC or NCUA.
• What is the fee structure? A great interest rate isn’t so great if high fees eat up your return, so do your homework and look for a savings account with no or low monthly maintenance and other fees.
• How are the customer reviews? Take the time to find out what other customers have to say about the financial institution’s customer service, technology, products and features.
• Does the account have minimum balance requirements? If the account has minimum balance requirements, your balance must either meet those requirements during each statement cycle or you’ll owe a fee. Online banks usually don’t have minimum balance requirements.
• What is the initial deposit requirement? Although many banks have reasonable initial deposit requirements, the lower the initial deposit requirement, the better.
• What is the monthly transaction limit? If you’d rather not worry about transaction limits and related fees, determine how many monthly deposits or withdrawals you can make.

High-Yield Savings Accounts With the Best Rates

Because the main point of a high-yield savings account is to get the best return for your money, you’ll want to compare rates at different banks to ensure you find one that’s competitive with the rest of the field. So, which savings account will earn you the most money? Here’s a list of banks that have consistently offered some of the highest rates. Keep in mind that rates are subject to change and might involve meeting certain requirements. 

How Much Will $10,000 Earn in a High-Yield Savings Account?

If you put $10,000 in a high-yield account at one of the financial institutions featured in the previous table, you’d earn about $500 in one year. High-yield savings rates are several times higher than the latest national average savings account rate of 0.46%. Assuming your variable rate remains constant for one year, interest is compounded monthly and you pay no account fees and make no other deposits or any withdrawals, here is how much your $10,000 could earn in one year compared to the national average savings account rate:

Considering the many high-yield savings accounts available with no fees or minimum balance requirements, leaving money in a traditional savings account can cost you significant interest, even if you don’t have $10,000 saved.

Are High-Yield Savings Accounts Worth It?

High-yield savings accounts may be best for you if you are comfortable with digital-only banking and need extra incentive to save more — the all-mobile Varo Bank Savings Account has a tiered APY program that offers higher rates if you meet certain requirements.

If you value free and flexible accounts, Marcus by Goldman Sachs, Member FDIC, features no monthly service fees or minimum deposit requirements. Once you’ve prioritized what you want from a high-yield savings account, keep in mind other factors.

Final Take

When you consider a high-yield savings account in comparison to a traditional savings account, they ultimately function in the same way. They are both deposit accounts that let you earn interest on your money and are ideal for saving for a home down payment, an emergency fund, a dream vacation or some other financial goal. If you are looking to start a savings account and know you can leave it alone for a while, a high-yield savings account might be the right choice.

Vance Cariaga and Caitlyn Moorhead contributed to the reporting for this article.

Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of Nov. 7, 2023.

*Capital One interest rates accurate as of April 11, 2024. See website for all current rates.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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