Stashing your money in a regular savings account isn’t ideal either; the interest rate on a traditional savings account could be as low as 0.01% a year — practically nothing.
Luckily, there’s a middle ground. High-yield savings accounts pay substantially more than traditional savings accounts, giving the funds you deposit the chance to grow.
Here's everything you need to know to score a high-interest account and start making money while you save.
How do high-yield savings accounts work?
With a high-yield savings account, you’ll earn a lot more interest than you would with a traditional savings or checking account. As a result, you’ll generate more money from your savings over a shorter amount of time.
What's the catch? Often with a high-yield account, you need to make a certain minimum deposit, maintain a minimum balance or pay regular fees — though not necessarily.
When you start looking for a high-yield account, the first number you’ll see will be APY, or annual percentage yield.
APY is the yearly rate of return on the money in your account, and it includes compound interest, which is the interest earned on your interest.
The more often your investment compounds and builds interest on the interest already earned, the faster your savings grow.
It’s a good idea to get into the habit of making regular contributions every month, since that will increase the amount of money in your account earning interest.
So how much higher is the interest on a high-interest savings account? As of January 2020, the best rates were around 1.90% — that’s almost 200x more than a traditional savings account.
If you were to put $10,000 into a traditional savings account with a 0.01% interest rate, you’d only earn $1 in interest during an entire year.
Compare that to a high-yield savings account with a rate of 1.70%, which would earn you $170 in interest over the course of a year — quite a difference. And that’s without making any monthly deposits.
At the same 1.70% rate, making a monthly deposit of $200 over one year would earn you $188.64; over three years it would earn you $698.70, and over five years it would earn you $1,390.83.
As you can see, the gains from monthly deposits add up considerably over time.
High-yield savings accounts are secure
Similar to traditional savings accounts, high-yield accounts are federally insured up to $250,000 if you're dealing with a bank insured by the Federal Deposit Insurance Corporation (FDIC), or a credit union insured by the National Credit Union Administration (NCUA).
Old-school brick and mortar financial institutions aren’t your only secure option though; a growing number of high-yield savings accounts are being offered by online banks, and the FDIC insures many of them as well.
Opening a high-yield account with an online service like Credit Karma does come with certain perks; since they don’t have to cover the costs of a physical location, online banks will often pass along savings to customers in the form of higher APYs.
The downside is that online banks can have slower customer service response times and may provide limited access to your money — although having your savings in a harder-to-access account could actually help you save more.
While you may bristle at the idea of dealing with an online bank in addition to your primary bank, it’s a lot less painful than you might think. Electronic bank-to-bank transfers are quick and secure, and most online banks try to make the process as easy as possible.
Should I get a high-yield savings account?
The great thing about high-yield savings accounts is that they’re versatile; whether you’re planning for your wedding or preparing for retirement, you can rest easy knowing that the money you’re putting towards your goal is growing.
Some popular reasons for opening a high-yield savings account include:
You never know when you’ll need money for unexpected expenses, and high-yield savings accounts are a great place to store your emergency fund. At minimum you should have enough emergency money saved to cover your expenses for three months, and that extra interest may come in handy if you need cash in a hurry.
If you’re hoping to take a big vacation in the next few years, keeping your travel budget in a high-yield account is a smart idea. Depending on how far ahead you start saving, the interest you earn may be enough to cover the cost of your plane ticket — or at the very least sample some of the local cuisine.
High-yield savings accounts are also ideal if you’re saving up for a major expense, like a new car or a home renovation. The current rate of inflation in the U.S. is 1.90% — roughly the same rate as a high-yield savings account — so even if the price of the item you’re hoping to purchase goes up, you should still be able to afford it.
You can open a high-yield account even if you don’t have a specific plan in mind for the money. If you’ve got some surplus cash sitting around in your checking account, there’s no downside to putting it into a high-yield savings account and letting it earn you money.
Opening multiple high-yield accounts can be helpful too, especially if you’re saving for a variety of different things. That way if your new car costs more than expected, you won’t be tempted to dip into your emergency fund to cover the difference. Having more than one account will also allow you to take advantage of multiple perks, like higher introductory rates or new account bonuses.
How to open a high-interest savings account
Before you open a high-yield savings account it’s worthwhile to shop around a bit. If your current bank offers a high-yield account with a decent rate, great — just remember, you aren’t obligated to stick with one financial institution if you can find a better rate elsewhere.
Compare your options
There are a few key things you should look for when you’re comparing your options for a high-yield account:
You’ll likely be drawn to the high-yield accounts that offer the highest interest rates, but you should clarify whether the rate being offered is standard or if it’s an introductory rate that will change after a certain amount of time.
Some banks will offer an attractive rate to start, but if it decreases after a set period of time you could wind up making less money than you would if you’d gone with a slightly-lower standard rate.
You should also look into whether there are minimum or maximum thresholds you need to meet in order to maintain your rate, and confirm that they’re feasible for you.
Many financial institutions will require you to make an initial deposit to open a high-yield account with them, so you should make sure that you’re comfortable setting aside that amount of money upfront.
There may also be minimum balance requirements in order to keep your account active; falling below the minimum balance could result in fees or affect your interest rate.
Some financial institutions may charge introductory fees for opening a high-yield account, and monthly maintenance fees for keeping it open. It’s important that you understand what these fees are and whether there are ways to avoid them.
You should also check whether there’s a fee for exceeding the federally-mandated limit of six withdrawals from a savings or money market account per month — some banks may even charge a withdrawal fee before the federal limit.
Easy access to your money
How easy it will be to access the money in your high-yield account is another thing to consider. Some banks will allow you to make withdrawals instantly using an ATM card, while others may require a waiting period of several days before your transaction is processed.
As mentioned above, easy access to your savings might not always be a good thing; if you can dip into your account anytime you want, it may take you longer to reach your savings goal than you’d like. Know your level of self-restraint and plan accordingly.
Ways to deposit money
You’ll also want to look into the options available for depositing money in your account. Some financial institutions offer convenient smartphone apps, while others may require deposits to be in the form of a check.
If the high-yield account you’re considering is not with your primary bank, make sure that the option for bank-to-bank transfers is available.
Lastly, you should find out how frequently the interest you earn from your account will be compounded. An account in which interest is compounded daily will allow your savings to grow faster than an account where interest is compounded yearly; the more often interest is added to your balance, the more growth you’ll see in your savings.
No matter how much money you have available for savings at the moment, opening a high-yield savings account is a wise decision.
Use the handy table below to compare rates and find an account that’s right for you: