A high yield savings account can be a viable savings solution that preserves your access to cash while still paying a return high enough to outpace inflation.
Lower interest rates have been the new reality since the financial crisis making it more difficult to find an attractive interest rate for savings.
What is a high yield savings account?
Also known as a high interest savings account, a high yield savings account (HYSA) is a bank account that pays a higher interest rate than a traditional savings account.
With traditional savings accounts, it isn’t unusual to find interest rates as low as 0.05% annual percentage yield (APY), with many accounts paying closer to 0.01% APY.
High yield savings accounts can provide a return several times higher, with a number of accounts now offering rates above 2.0% APY and some even above 2.5% APY.
That’s 50 times — or more — the amount of interest than you can earn with many traditional savings accounts.
With the core inflation rate at about 2% in recent years, a high yield savings account offers a sanctuary for emergency savings or a place to park money while between investments by paying an interest rate that’s often higher than the inflation rate.
With traditional savings accounts and other lower-interest vehicles, the purchasing power of savings slowly erodes because the cost of goods and services are increasing at a faster rate than the account pays in interest.
How does a high yield savings account work?
Most high yield savings accounts are offered through online banks. Local, regional, and national brick and mortar banks typically have higher overhead.
With the reduced cost of doing business common to online banks, higher interest rates and other perks become possible.
The caveat is that you may have to sacrifice some convenience.
Expect to manage your high-yield account online as opposed to being able to visit a local branch and speak with someone in person.
It’s no secret that banks lend out the money we deposit in savings accounts, and this is true of high-yield savings accounts as well.
The reduced overhead allows a higher interest rate to be paid on deposits and the bank also makes a profit on the difference between the interest rate it pays on deposits and the interest rate it collects on money it lends to consumers and businesses.
Much like a standard savings account, a high yield savings account is insured by the Federal Deposit Insurance Corporation (FDIC), which protects your deposits with the bank up to $250,000.
If your high yield savings account is provided by a credit union rather than a bank, it’s likely your deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF).
You may also find high yield accounts available from investment companies or other types of businesses.
Chances are good that these companies have partnered with banks to provide FDIC insurance for deposits, but be certain that your funds are protected before opening an account.
Annual percentage yield
The annual yield you earn may be driven by the amount you have in your account.
For example, to earn the advertised rate, you may need to keep a higher balance while lower balances earn a lower APY.
Annual percentage yields are also variable, so if interest rates fall, your yield may also fall.
The APY takes compounding into account, so it will be higher than the interest rate. For example, a 2.0% interest rate is about 2.02% APY with monthly compounding.
Compounding can be daily, monthly, or quarterly, but monthly or daily compounding are the most common and the APY for your account already factors in the compounding frequency.
Think of the APY as a way of being sure you’re comparing apples to apples. Interest rates alone can’t make the same claim because the compounding frequency can differ.
What should you look for when opening an HYSA?
Depending on how you intend to use your account, some features or restrictions may be bigger considerations than others.
Here are some of the most important things to weigh when choosing a high yield savings account.
Getting started with a high yield savings account doesn’t always require a large commitment, but it can.
The minimum amount required to open a high yield savings account varies from $0 or $1 to as much as $25,000.
If you shop around, you should find plenty of options on the lower end of the range.
Many popular high yield savings accounts have initial deposit requirements between $25 and $500.
Be aware that there may be a separate balance requirement to earn the highest rates, with lower balances earning a reduced APY which is often still higher than you can earn with a traditional savings account.
After the initial deposit to open your high yield savings account, there may be a minimum balance requirement as well.
Competition often brings better financial products, however, and many banks have a minimum balance requirement as low as $0.
When balances are lower, you may see fewer benefits.
Some accounts may reduce the APY for the account based on the lower balance or a low balance may trigger monthly service fees for the months in which the balance falls below a certain threshold.
The percentage you earn annually on your balance is the interest rate, although you may also see it referred to as an annual percentage rate (APR).
In lending, there can be a bigger distinction between the two terms because an APR includes fees that affect the true cost of borrowing.
More commonly, you’ll see high interest savings accounts advertise their annual percentage yield (APY), which takes compounding frequency into account.
Most high yield savings accounts compound either monthly or daily.
This means you don’t have to wait until the end of the year to earn interest. Your account might be earning interest every day.
For monthly compounding, the interest rate is divided by 12 and the resulting figure is your monthly rate.
Daily compounding accelerates the compounding speed for your account, but keeping an eye on the APY is an easier way to measure interest gains because compounding, whether monthly or daily, is already factored into the yield.
Most high yield savings accounts are through online banks or other online providers like investment companies, so you probably won’t be able to make deposits at a local branch.
The options you have for making deposits can be an important consideration.
Typically, you’ll have the option of transferring money by ACH transfer from another bank account, which takes 1-2 days and should be at no charge.
Some accounts also support wire transfers, which are often completed the same day but which can have multiple fees, making them a pricier option.
Checks can be mailed as well in many cases, although a slower solution, and many accounts provide the option to use a mobile app to complete deposits. Expect mobile apps to use ACH transfers to complete the transaction.
Earning a higher rate on your savings is great but access to your money may be important as well.
ACH transfers are the most commonly available option, which means it may take a day or two for your transfer from your high yield account to reach your regular checking or savings account.
- Checks: Some high yield savings accounts provide check-writing privileges, but these are the exception rather than the rule.
- Debit: Your high yield account may also provide access to funds through a debit card, adding convenient access to your money. Be aware that there may be fees for debit card withdrawals.
- ACH transfer: ACH transfers are the most commonly available way to move money in or out of your high yield savings account. Typically, ACH transfers are free and are completed within 1 to 2 banking days.
- Wire transfer: Your high yield account may support wire transfers as well, which are fast, but may generate 2 separate fees. You may have a fee at your local bank as well as a fee with the high yield account.
Number of transactions
Federal regulations restrict the number of allowed account transfers to 6 per month.
Your high yield account may disallow additional transactions once the limit of 6 is reached or there may be a fee.
Continued overages can result in your account being closed or converted to another type of account.
Using an ATM or a teller can sometimes help you get around the limit, if needed, but expect electronic or automated transfers to be limited.
Although often more wallet-friendly than many traditional bank accounts, high yield savings accounts can have several types of fees that may apply.
Among the most common is a monthly maintenance fee, which usually only applies if your balance falls below a certain level.
Other fees you might encounter include:
- Dormant account fee
- Wire transfer fee
- Overdraft fee
- ATM fee
- Early closeout fee
- Excessive transfer fee
How much can you earn in a high yield savings account?
In most cases, high yield savings accounts use APY to advertise their rates.
Here’s what a $10,000 deposit could earn after 1 year, 5 years, 10 years, and 20 years using APY to calculate the earnings.
|$10,000 deposit||Value after|
|0.05% (standard savings)||$10005||$10025.03||$10050.11||$10100.48|
|1.5% (high yield savings)||$10150||$10772.84||$11605.41||$13468.55|
|2.0% (high yield savings)||$10200||$11040.81||$12189.94||$14859.47|
|2.5% (high yield savings)||$10250||$11314.08||$12800.85||$16386.16|
If you don’t mind using an online bank, which is common for high yield accounts, the difference in interest earnings can be significant when compared to a standard savings account.
A $10,000 deposit can earn as much as $250 in interest in the first year with a high yield account compared to a standard savings account which may pay only $5 on the same balance.
Alternatives to high yield savings accounts
Depending on the goals you’ve set for your savings accounts, some alternatives may be a better fit or can be used in combination with a high yield savings account.
Regular savings accounts
A traditional savings account offers more convenience because you can manage the account at your local bank branch and transfers to your checking account with the same bank are usually instant.
What you’ll often sacrifice, however, is earnings.
Some of the biggest names in banking pay 0.01% to 0.05% APY on regular savings accounts.
Compared to the 1.5% to 2.5% APY commonly found with high yield savings accounts, it’s clear that a regular savings account has a cost even if there are no fees.
Regular checking accounts
Most checking accounts don’t pay interest at all and a large percentage require a minimum balance to avoid fees.
While checking accounts play an important role in personal finance, your money will work harder if you keep the excess that you don’t need for bills in a high yield account.
Rewards checking accounts
Cash-back account or interest-bearing checking accounts are available but aren’t yet the norm.
Much like high yield savings accounts, rewards checking accounts are more likely to be found online than at your local bank.
Maintenance fees are common if you don’t maintain a certain balance, often as much as $1,000.
Passbook savings accounts
Less common than in the past but still available with some banks, a passbook savings account is an old-school way of saving that restricts access to savings without the passbook, which acts as a ledger for the account.
Interest rates aren’t the man draw with a passbook savings account.
Instead these accounts are attractive to some because they make it a bit more difficult to access your money, keeping your savings out of harm’s way.
Rates for certificates of deposit can be competitive with yields offered by high yield savings accounts.
The big difference is that you often have to make a lengthy time commitment to earn the best rates on CDs.
If you shop around, however, you might find a promotional offer that pays well even for a shorter time commitment.
Money market mutual funds
Yields for money market funds can be also be competitive with those of high yield savings accounts.
A money market fund is an investment, however, which means your money isn’t insured by the FDIC, which insures bank deposits, or NCUSIF, the insurer for credit union deposits.
It’s also possible to lose part of your principal with a money market account.
Common Q&A about high yield savings accounts:
Is a high yield savings account a good idea?
With so many online banks now offering high yield accounts, it’s possible to find several attractive options that have limited restrictions.
Initial deposit requirements and minimum balance requirements shouldn’t be a concern if you choose carefully, making a high yield savings account a good option for nearly every household.
What is the difference between a high yield savings account and a money market account?
Money market accounts often use tiered interest rates based on account balances, with higher balances earning higher interest rates.
This structure can exist with high yield savings accounts as well, but usually there are only two tiers for high yield savings accounts.
Regardless of branding, money market accounts and high yield savings accounts are federally insured in nearly all cases and are governed by the same federal rules regarding transfers.
How often do high yield savings rates change?
Rates for high yield accounts can change monthly, quarterly, or biannually.
Rates can move in either direction but banks have an incentive to make rates attractive to encourage larger balances and attract new depositors
Do banks run a credit check for a high yield savings account?
Many banks run credit checks before opening accounts but these inquiries are “soft pulls”, which means you aren’t requesting new credit and your credit score isn’t affected.
Lower credit scores can affect eligibility for a bank account with some banks, however.
Can I open a high yield savings account if I owe another bank money?
Your banking history, in particular, can affect your ability to open a high yield savings account.
A report similar to a credit report provides information specifically on banking activities, such as overdrafts and unpaid fees.
If you owe money to another bank, the bank you’re applying with may decline your account application.
Can you lose money in a high yield savings account?
There are 2 ways to lose money with a high yield savings account.
If fees or other account expenses exceed the amount earned in interest, your account balance suffers the loss.
The second (and less likely) possibility is that you deposit more than the amount covered by FDIC insurance and the bank becomes insolvent. The amount above the insurance limit is at risk.
Are high yield savings accounts taxed?
Interest earned on a high yield savings account is taxable as ordinary income.
Protect your savings from inflation with a high yield savings account
Now that interest rates are slightly higher than in recent years, a high yield savings account can be a great option for saving and protecting your savings from inflation.
You’ll have to sacrifice a bit of convenience in many cases, but having your savings outside of easy reach isn’t necessarily a bad thing and could help reduce impulsive spending or push you toward other options rather than tapping your savings account.
Look beyond just the advertised APY when choosing a high yield savings account.
Minimum balance requirements, maintenance fees, and access to funds should all be considered as well.
Also look for the FDIC or NCUSIF logo when shopping for a high yield account.
You’ll find a number of well-known names as well as many online banks you may have never heard of before.
It’s important to know that your deposits are insured and that you’re working with a bank that will be around for years to come.