What is a High Yield Savings Account?
A high-yield savings account is a savings account that typically pays 20 to 25 times the national average for a standard savings account. Traditionally, people held a savings account with the same bank as their checking account, and transferring money between the two was easy and fast. But with the advent of internet-only banks and traditional banks opening their doors to customers across the country through online account opening, competition has begun to intensify. Savings rates have soared, creating a new category of “high-yield savings accounts” “;
Considering the difference between high-yield savings account rates and the national average, the increase in earnings is significant. For example, if you hold $5,000 in savings and the national average is 0.10% APY, you’ll only get a return of $5 a year. If you put the same $5,000 into an account that earns 2%, you’ll earn $100.
KEY TAKEAWAYS
- The interest rate on a high-yield savings account can be 20 to 25 times the rate on a traditional savings account.
- You might be able to open a high-yield savings account where you’ve already banked, but the highest rates are usually only available from online banking.
- Electronic transfers are easy to set up between a high-yield savings account and your checking account, even if you hold them at different banks.
- When considering different high-yield savings account options, weigh factors such as initial deposit requirements, interest rates, minimum balance requirements, and any possible account fees.
You may need to hold your savings account with one institution and your checking account with another. If you’re used to holding two accounts at the same bank, this may feel awkward at first, but today’s inter-agency electronic transfers – and the speed at which those transfers are executed make checking accounts at Bank A and savings at Bank B Transferring funds between accounts has become relatively simple.
You will also find that, unlike traditional brick-and-mortar institutions that provide a one-stop shop for all banking needs, institutions that offer high-yield savings accounts often limit their functionality or offer few or no other products. Many banks do not offer to check accounts, and few offer ATM cards, requiring that all inflows and outflows from savings accounts be made through electronic bank transfers or mobile check deposits (if available).
But rest assured, an important feature of traditional savings accounts and high-yield accounts is the same: federal insurance against bank failures by the Federal Deposit Insurance Corporation and the failure of credit unions by the National Association of Credit Unions. When opening an account, simply check if it is an FDIC or NCUA member.
You’ll also find federal regulations limiting withdrawals from savings accounts. Any kind of bank savings account, whether traditional or high-yield, has a one- to six-month cycle. With that in mind, it’s worth learning how to find and open high-yield accounts and considering whether it’s worth adding one to your financial portfolio.
Decide how to use a high-yield savings account
Of course, a high-yield savings account should only be part of your entire financial portfolio. Consider how best to use this account to complement your other savings and investment strategies, and determine from it a prudent amount of cash that you think will remain liquid for your particular situation.
For example, are savings accounts used as emergency funds? In this case, financial experts usually recommend having three to six months of living expenses on hand.
Maybe instead, you’re using a high-yield account to save up for a big purchase, like a house, a car, or a big vacation that you’ll take over the next five years. During this time frame, it is best not to put money into investments that may lose their value. Therefore, regularly putting money into a high-paying savings account can help you protect your principal while using your interest income toward your savings goals.
Still, others will open high-yield savings account for no specific purpose other than to store any remaining cash they have withdrawn from their checking account. Since checking interest rates are often minuscule or zero, when you don’t need extra funds to pay for everyday transactions, moving those funds into savings can provide a month’s worth of interest payments you wouldn’t otherwise get.
Of course, more than one of these options can be used to segregate your savings for simultaneous use or to achieve goals. Many institutions allow you to open multiple savings accounts and even give them personalized nicknames (like Auto Fund, Vacation 2020, etc.). Or you can open high-yield savings account with several of the highest-income institutions. Multiple savings accounts make it easy to track progress toward your goals, and it’s simpler to keep your hands away from money you don’t want to touch, like your emergency fund.
What to Look for in a High Yield Savings Account
Whether you’re buying a high-yield account at a new institution or fortunate enough to have one at your current bank, it’s always wise to compare options on the market. The difference in interest rates and fees can increase over time, especially when you keep a relatively large balance in your savings. Here’s what to look for and compare:
1 Interest rate
How much interest does this account pay now? Is it a standard price or an introductory promotion price? ; Savings account interest rates are generally flexible and can be changed at any time. But some customers will make it clear that the currently announced prices are only for the initial period. Another factor to consider is whether there is a minimum or maximum balance threshold to earn the promotional rate.
2 Required initial deposit
How much does it cost to open an account? Did you feel comfortable saving so much money at first?
Minimum balance required
How much do you need to keep in your future account? You’ll feel comfortable always hitting the minimum threshold, as falling below the minimum threshold may incur fees or invalidate your expected interest rate.
4 Fees
Does the bank or credit union charge on this account? If so, is there any way you can avoid it (eg, always keep your balance above the minimum)? Also, if you exceed the federally mandated limit of six withdrawals per month, what are the bank’s non-compliance fees?
5 Links to other bank and/or brokerage accounts
Will the bank allow you to link between your high-yield savings account and your savings account at another bank or brokerage? Are there restrictions on linking multiple accounts, or a waiting period for new accounts, during which you cannot change your initial linked accounts?
6 Access to your funds
If so, what are the options for withdrawing funds? Can you withdraw money from savings with an ATM card?
7 Deposit options
If you wish to deposit a check into your account, does the bank have a smartphone app that offers mobile check deposits? Otherwise, can you mail a check or deposit at an ATM?
8 compound methods
The bank can specify that the interest will be compounded on a daily, monthly, quarterly, semi-annual, or annual basis. While more frequent compounding could theoretically increase your real rate of return, if you insist on comparing accounts by APY rather than APR, the compounding factor is already factored in.
How to Open a High Yield Savings Account
If you’re lucky enough to have competitive high-yield savings account with your current bank, opening a new account will be a breeze. This will be possible through your online banking portal with little need to enter personal information as you have already checked with the institution.
If you’re opening a savings account with a new institution, the process is more complicated, although none of it is overly complicated. Almost all high-yield savings accounts can be opened online, so you’ll need to set aside about 15 minutes to fill out the electronic application form on your computer. You’ll also have your driver’s license, Social Security number, and primary bank account information on hand to facilitate the application process.
bottom line;
A high-yield savings account can be a useful middle-ground for your money, offering the protection of your principal, the security of federal insurance, and a higher yield than a regular savings account, albeit less than you would pay from high Potential gains from venture capital. Be sure to figure out how one or more high-yield accounts can best serve your financial goals and circumstances. Then, do your homework and find an account that will maximize your income while allowing you to avoid fees, with no imposed limitations that don’t suit your needs.
