What are high-yield savings accounts?

You may not realize it, but you probably have some form of savings account. If you have money in your possession and you choose not to spend it, opting to save it for later, you’ve contributed to your own personal “savings” account. That could be a jar of change, a few bills in your junk drawer, or old fashioned savings account with a bank. There are a few different types of savings accounts offered but the one to get on board with is the high-yield savings account.

What is a high-yield savings account?

A high-yield savings account is an account that pays the account holder a higher-than-average interest rate. If the average savings account in the U.S. offers an interest rate of 1%, for example, then a high-yield savings account might offer a 1.75% to 2% or higher interest rate.

Savings is the cornerstone of personal finance. Most experts recommend that everyone have a mini-emergency account in place while working toward a larger emergency fund that can cover their bare-bones expenses for at least three months. Putting some of your extra money into high-yield savings is a great way to build an emergency fund, set aside money for that dream vacation, or just save up for a big-ticket item. But first, you should have a tiny bit put aside for less expensive inconveniences.

For most people, a $500 to $1,000 mini-emergency fund will suffice. Stash the money somewhere liquid, but not too accessible—like a savings account connected to your checking account.

You can open a high-yield savings account with any bank or credit union, either online or at a physical location. A brick-and-mortar financial institution may ask for identification and typically will require you to make an initial deposit of $25 to $100 to get the account started.

Once the account is opened and funded, the money you put in it will earn interest (money the bank pays you, the account holder) over time. The bank or credit union will pay you this interest on a regular basis, usually monthly, quarterly, or semiannually.

You can deposit money into a high-yield savings account any time you wish to make your account balance grow. You may also make withdrawals from the account, though you may be limited as to how many times you can take your money out in a given month.

High-yield savings account pros

The obvious pro of a high-yield savings account is its higher-than-average interest rate. If you’re going to park your money, it should earn you the most possible while it sits there. Additionally, as long as you’ve chosen an accredited institution, your account will receive the same insurance provided by the FDIC.

High-yield savings account cons

Many online-only banks are the ones offering the highest yields on their accounts. And as such, most high-yield savings account holders won’t have a physical branch to go to if they need help or to immediately withdraw their funds by ATM. With some online transfers, users might experience a slight delay of a few days before the money hits their checking accounts.

What to know about high-yield savings accounts

Annual Percentage Yield (APY)

A savings account’s APY will show you how much interest you can expect to earn over the course of a year. For example, if you deposited $10,000 into a savings account with an APY of 2%, you can expect to earn roughly $200 in interest in one year’s time. If you were to withdraw all of your money after the first six months, you’d get $100 in interest. You can use APY to compare different savings accounts’ advertised interest rates.

Compounding method

Closely related to APY is the financial institution’s compounding method for its savings accounts. While it’s most common to expect your interest payments on a quarterly basis, some institutions will pay interest monthly, semi-annually, or annually. The more compounding, the faster your money grows.

Initial deposit

Every bank and credit union will have a minimum initial deposit amount to open a high yield savings account. Some institutions will let you open an account with $0 down with the expectation that you’ll fund the account within 30 days, but most will usually ask that you make an initial deposit of at least $25 to $100 to open the account.

Minimum balance

To entice you to keep your high yield savings account as full of cash as possible, banks and credit unions will waive account maintenance fees and offer their most competitive APY as long as your balance stays above the account’s minimum balance requirement.

If your account balance dips below that amount in a given month, you may be required to pay a maintenance fee on your account and earn a lower APY on your money until your balance rises above the minimum balance. So before you choose a savings account, be sure the minimum balance on it is something you can maintain.

Account fees

High-yield savings accounts may come with monthly maintenance fees or penalties for exceeding the monthly six-withdrawal limit. Fortunately, there are options that run without fees.

Withdrawals and deposits

While six withdrawals per month are allowed by a federal mandate for every savings account, some banks and credit unions offer more flexibility than others, which is important if you need quick access to your money in the event of a financial emergency.

How much to put into high-yield savings

If you’re willing to overlook the cons, a high-yield savings account can be used to store all of your savings—with one exception. Mini-emergencies fall into the short-term savings category and should be treated differently than your long-term savings.

You may choose to put your mini-emergency funds into a traditional savings account that is attached to your checking account so that when life’s little bumps happen you can cover them without delay (think a flat tire or a surprisingly high gas bill).

High-yield savings accounts to build wealth

Long-term savings goals like a downpayment on a home, college tuition, seed money for a business, or a major vacation deserve their own special place in your saving and investing strategy.

There are more than 5,000 different banks and credit unions across the U.S. and thousands more across the world, so it’s important to know how to shop for high-yield savings accounts. While you may first be attracted to savings accounts that offer the highest annual percentage yield and thus pay the most interest, it may be wise to also consider which accounts and financial institutions charge the lowest fees and offer the most flexibility to access your money, especially if you plan to use your savings account as an emergency fund.

The bottom line

Everyone needs an emergency fund and a place to stash their long-term savings. A high-yield account is a great place for that because you can earn much more than a traditional account. The ideal high-yield savings account is one that blends a high-interest rate with low fees and easy access.

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