If you’ve spent any time browsing high-yield savings accounts online, you know that many offer similar annual percentage yields (APY). The difference in rates between top banks is usually a fraction of a percent. So, when rates are fairly similar, how do you choose a high-yield savings account? What else should you look for?
A high-yield savings account is an interest-bearing bank account that offers a higher APY than traditional savings accounts.
You can open a high-yield savings account at most financial institutions, either in-person or online.
When choosing an account servicer, it’s important to evaluate fees, penalties, FDIC insurance, minimum balance requirements, minimum opening deposit requirements, withdrawal limits, and overall accessibility.
The pros of high-yield savings accounts are that they’re high-interest, secured against financial loss, and relatively accessible.
The cons of high-yield savings accounts are that their APYs are not fixed, they’re not ideal for building long-term wealth or for everyday banking, and they have stricter requirements than traditional savings accounts.
What is a high-yield savings account?
A high-yield savings account is a savings account that allows you to earn compound interest on the funds you deposit. Some traditional savings accounts do this, but their rates aren’t nearly as high. The national average APY for traditional savings accounts is 0.39%. High-yield savings accounts, on the other hand, offer upwards of 4.0% APY.
So how does that affect your savings? Let’s say you open a high-yield online savings account with a 4.0% APY. In this example, you deposit $20,000, then make regular monthly deposits of $200. After five years, you could have $5,568.86 in total interest earned. Between that and your regular deposits, you’d end up with $37,568.86 in savings, provided that the interest rate stayed the same throughout those five years.
Now, if you had put those same deposit amounts into a traditional bank account, your savings would look very different. After five years at a 0.33% APY, you would have $32,429 in total savings, and only $429 would be interest earned. That means you’d miss out on $5,136 in total interest earnings simply because you stored your money in a different account type.
*Hypothetical scenario, results may vary.
While high-yield savings accounts offer some pretty strong benefits, they’re not without disadvantages. Generally, they’re a little more restrictive than traditional savings accounts. High-yield accounts may require monthly fees, minimum balances, or a minimum deposit to open them. Some may also put a limit on your monthly transfers or withdrawals.
How to choose a high-yield savings account
Picking a high-yield savings account isn’t just about APY. You’ll want to check for other features, too, like easy access to your money and a guarantee that your cash will be kept safe. Here’s what you should look for if you’re shopping around for a high-yield savings account.
1. FDIC insurance
FDIC stands for “Federal Deposit Insurance Corporation.” This is the organization that insures your money against loss in case of bank failure. Most top high-yield accounts are FDIC-insured up to $250,000 per depositor. This means that if the bank fails, you’re eligible to recoup up to $250,000 of any lost savings. You can tell a financial institution is insured by looking for the “Member FDIC” badge on the bank’s website.
Note that many credit unions are also insured. Look for the National Credit Union Administration (NCUA) badge on the institution's website to make sure.
2. Required initial deposit
Some high-yield savings accounts require an initial minimum deposit. This will be the amount of money you need to deposit in order to open the account. It could be as low as $25 or up to $1,000 or more. You might assume that higher-APY banks require higher minimum deposits, but this isn’t always the case. Many high-yield savings accounts with APYs of 3.0% or higher don’t require any minimum deposit to earn interest.
The “annual percentage yield” refers to the percentage of your savings that you’ll earn back in interest each year. APY factors in the account’s interest rate as well as other relevant factors, like fees and compounding frequency, to give you a clear idea of how much you’ll actually earn.
APY is a better metric for evaluating high-yield accounts than interest rates alone. That’s because Interest can compound daily, monthly, or weekly. When you see a bank advertising a 4.0% interest rate, for example, you won’t know how much you stand to earn unless you know how often it compounds. But if you see a bank advertising a 4.0% APY, you can be confident that, no matter how often interest compounds, by the end of the year, you will have earned 4% interest on your money.
4. Minimum balance
Some banks not only ask for a minimum deposit, but also require you to maintain a minimum balance. This is the amount of savings that you’ll need to keep in your account at all times. Failure to maintain the required minimum balance could result in a penalty or fee, a pause on interest earnings, or even the closure of your account.
5. Fees and penalties
You may have to pay fees to open or maintain a high-interest savings account. Many banks charge monthly service fees to keep your account running. You may also have to pay a penalty if your account dips below a certain balance or if you exceed your bank’s withdrawal or transfer limits. Also keep an eye out for overdraft fees.
6. Withdrawal limits
Before the COVID-19 pandemic, you were limited to withdrawing and transferring your money up to six times every month. Since then, the federal reserve has removed such limits, and many banks now offer unlimited transfers and withdrawals per month. If a bank does have a monthly limit, you’re likely to incur a penalty if you exceed it. Before you open an account, one of the most important things to determine is how often you’ll be able to withdraw.
One of the biggest benefits of a high-yield savings account is that your funds are relatively accessible. Unlike with a certificate of deposit (CD account), you don’t have to lock your money in for a set term or into a particular asset. And unlike with the stock market, you don’t have to worry about losing a chunk of your savings if the market takes a sudden downturn.
That said, accessibility does vary from account to account. Some banks offer online banking portals or mobile apps, while others may require you to go to a brick-and-mortar institution to make transfers and withdrawals. With many accounts, you’ll be able to set up ACH wire transfers and direct deposits, while some will let you withdraw cash with an ATM card.
Pros and cons of a high-yield savings account
High-yield savings accounts come with some big advantages that the average deposit account can’t offer. Here are a few of the most important:
Easy to open: High-yield savings accounts are relatively straightforward to set up. As with opening any new account, you’ll need your social security number, some identification, proof of a physical address, and cash or a check ready to make that first deposit. You can open a high-yield savings account online or in person with a number of big national banks, including Marcus by Goldman Sachs, CIT Bank, Synchrony Bank, and Axos Bank.
Higher APY: The average savings account doesn’t offer anywhere near the APY that a high-yield account does. Right now, top banks are offering high-yield savings accounts with APYs more than ten times the national average for traditional savings accounts.
Accessible: Though you’re likely to earn more over time by investing your money in a retirement account or even a CD, these accounts also make your funds harder to access. With a CD account, for example, you will pay penalties on early withdrawals. Many high-yield savings accounts, on the other hand, allow unlimited withdrawals and transfers. This makes them an ideal place to store money you may need in the short term but also want to earn high interest on.
Safe: Compared to the stock market, high-yield savings accounts are a much safer place to store your money. Most accounts are FDIC-insured for up to $250,000 per customer, which means that if you deposit less than this, it’s virtually impossible for you to lose money up to the insured amounts. This is in contrast to the stock market, where it’s possible to lose a large portion of your investment if the market takes a sudden downturn.
Though high-yield savings accounts come with some great benefits, they’re not without disadvantages. Here’s what you should know before you open a new account of your own:
Bad for everyday banking: High-yield savings accounts are a great place to grow short-term savings, but they’re not ideal for storing money you hope to use on a regular basis. These accounts don’t come with credit cards, debit cards, or check-writing privileges. Some still charge penalties for withdrawing or transferring money more than six times per month. If you’re looking for a place to store your spending money, consider a high-yield checking account instead.
Strict requirements: You’ll likely have to jump through more hoops to open and maintain a high-yield savings account than you would with a traditional savings account. These include minimum balance requirements, minimum deposit requirements, and monthly maintenance fees.
Bad for building long-term wealth: Even though high-yield savings accounts offer higher interest rates than traditional savings accounts, they’re not high enough to keep up with inflation. If your goal is building long-term wealth, you’re better off investing. Consider bonds, or another high-growth investment vehicle.
APY is not guaranteed: Currently, the best high-yield savings accounts offer APYs of around 4.0%, but that rate is not fixed. So, while a bank may tout high rates now, those rates could drop at any time. That means the depositors could make significantly less than advertised.
Is a high-yield savings account worth it?
High-yield savings accounts can be worth having in a few specific situations. If you’re doing any of the following, a high-yield savings account could be right for you.
Growing an emergency fund
Experts recommend keeping three to six months’ worth of expenses in an emergency fund. This is a pool of savings you can tap into in case you lose a job or find yourself saddled with a large unexpected expense. A good emergency fund should give you enough financial cushion that you’ll never have to charge an ambulance bill to your American Express card.
But while important, growing a fund this large can take time. And it can take even longer if you’re earning a meager 0.33% interest, the national average among traditional savings account rates. So, if you’re trying to build an emergency fund — or grow an existing fund when more — a high-yield savings account can be a great solution.
Funding an important short-term expense
If you’re saving up for a big purchase, like a down payment on a house or car, a high-yield savings account could be right for you. Your money will be safe from market fluctuations and FDIC-insured, which means you won’t risk losing it over the short term. Then, when it’s time to make that purchase, your money will be accessible.
High-yield savings account alternatives
If a high-yield savings account doesn’t seem right for your financial goals, that’s ok. Some alternatives offer similar advantages.
A money market account
A money market account (MMA) is another one of the best savings accounts for storing up cash for a short-term goal. Like a high-yield savings account, an MMA is a type of interest-bearing account that offers higher-than-average APY. These accounts may come with restrictions similar to what you’d find on a high-yield savings account. However, they differ in one major way: Money market accounts offer greater access to your funds. MMAs often come with ATM cards, debit cards, and/or check-writing privileges. This gives you more control over how and when you use your money.
A CD account
Like a high-yield savings account, a CD is an interest-bearing account that offers a high APY. In fact, CD accounts may offer higher APYs than even high-yield savings accounts. (Some of the best rates for CDs right now are around 5.0%.) And unlike with high-yield savings accounts, that rate is fixed; it cannot drop over time. The downside, though, is that CDs come with more restrictions. You have to lock your money into the account for a set term –– generally anywhere from a few months to five or so years. If you want to withdraw early, you’ll have to pay a penalty.
Explore savings accounts on Navient Marketplace
You can open a high-yield savings account at most financial institutions, including credit unions, brick-and-mortar banks, and some online banks. If you’re in the market for a high-yield savings account, consider Navient Marketplace your number one ally. Navient Marketplace is a one-stop shop for all your personal finance needs. Browse banks, compare APYs, check eligibility standards, and find an account that meets your savings goals.