With economists muttering about a recession and the stock market fluctuating wildly, it can be tempting to stick your savings under a mattress and wait for all to be over. But putting your money in a traditional savings account won’t actually prevent losses: because interest rates on those accounts are so low, your money won’t grow nearly enough to keep up with inflation. That means your hard-earned cash will slowly lose its value. The better way to protect your money is to put it to work. That’s where a high-yield savings account can help.
Over the past few years, annual percentage yield (APY) rates on high-yield savings accounts have consistently risen, making now a great time to take advantage. A high-yield savings account is a type of deposit account that gives you easy access to your funds — while still letting you grow your savings at rates well above the national average. Here’s what you need to know, and how to open a high-yield savings account.
What is a high-yield savings account?
A high-yield savings account is similar to a traditional savings account, except it pays more in interest on the money deposited. Where a traditional savings account might pay a fraction of a percentage point in interest, current interest rates for top high-yield savings accounts are over 4.0%.
This is compound interest, which means your interest is added to your account balance, and the next interest calculation is made on the full amount. Compound interest is among the best ways to grow your money fast. In addition to having higher interest rates, high-yield accounts are also flexible, accessible, and low-risk.
How to open a high-yield savings account
1. Compare the APY and features of different accounts
Your first step is to shop around and get a feel for what your options are. Here are a few of the most important things to consider when choosing a high-yield savings account.
APY
APY, or annual percentage yield, is a measure of the money you’ll make in interest each year. The APY on a high-yield savings account typically ranges from 1.0 to 4.5%, and is currently capped at about 5.0%. (Note that the best rates can be up to 20 to 25 times higher than the national average for standard savings accounts.)
Fees
You should also make note of each financial institution’s fee schedule, which you can often find on their FAQs page and in specific account disclosures. Many banks charge overdraft fees, ATM fees, and fees for closing your account within the first 180 days. You may also face penalties for making more than six withdrawals per month. (This is the withdrawal limit on high-yield savings accounts as mandated by federal law.) Many accounts also charge a monthly service fee or monthly maintenance fee just to keep them open.
Minimum balance requirements
In addition to fees, some banks have minimum deposit requirements. You may need to make a minimum opening deposit to kick things off, and/or maintain a certain account balance to avoid penalties. Of course, not all banks have these kinds of requirements. If you don’t have a ton of extra cash on hand, you may want to look for a high-yield account without any minimums.
Access to funds
Finally, you should consider how you’d prefer to access your funds. While high-interest savings accounts rarely come with check-writing or debit card capabilities, some banks do provide an ATM card that you can use to withdraw cash. Others only allow ACH or wire transfers.
Deposit options also vary by account. Many only allow check deposits to be made by mail, and permit only transfers or direct deposits. Other institutions, like Ally Bank and UFB Direct (a division of Axos Bank) permit mobile check deposits via an app.
2. Prepare your personal information
When you’ve chosen the best high-yield savings account for your needs, the next step is to gather your personal information and begin the account opening process. You’ll likely need:
A form of identification, such as a driver's license.
Proof of your physical address.
Your social security number or Individual Taxpayer Identification number (ITIN).
3. Submit your application
Most big national banks provide streamlined applications that take just 10 minutes to fill out. If you’re working with a brick-and-mortar bank, you may need to make an in-person appointment to complete your application. If you’re using an online lender, you can almost always complete the entire thing online.
4. Make your initial deposit
Once your application is submitted and your identity is confirmed, you’ll be able to add money to your account. Usually, the easiest way to do this is to link your new account to an existing account and transfer funds.
Some financial institutions will also let you mail a check or use a credit card to make this initial deposit (though using a credit card often comes with high fees). If your account requires a minimum opening deposit, make sure your first deposit amount meets that minimum.
5. Set up online banking
The next step is to set up your online savings account, whether that’s via computer or your bank’s mobile app. From your online dashboard, you’ll be able to link additional accounts, enable mobile alerts, and initiate transfers. You’ll also be able to track your account balance and view your transaction history.
6. Name beneficiaries
If you weren’t asked to do so during the application process, now is the time to designate a beneficiary. If something were to happen to you, your named beneficiary will inherit the funds from your account. You’ll generally need their legal name, social security number, and other personal information.
7. Make sure you understand your account limits and regulations
Lastly, it’s smart to review all the requirements associated with your account. As the primary depositor, you should know how to avoid fees and how many monthly withdrawals you can make without penalty. Also check to see how you can maintain the APY you were initially offered. Some institutions require you to set up recurring transfers or direct deposits before they can offer you their highest APY.
Pros of a high-yield savings account
Higher interest rates than traditional savings accounts. In a traditional savings account, your money is safe, but it’s probably not growing. High-yield savings accounts, on the other hand, allow you to store your money safely while offering you higher rates. Generally, high-yield savings account rates are 15 to 25 times higher than what you’d get with a traditional savings account.
FDIC-insured for further protection. Unlike many stock-market investment vehicles, high-yield savings accounts are protected by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance — sometimes labeled on account disclosures as “member FDIC”— means that you cannot lose your savings due to a fault of your bank, even if the bank goes under.
More flexible than a CD account. A CD (certificate of deposit) account can offer high interest rates, but it will also require you to store those funds for a set term. While your money is in a CD account, you can’t withdraw it before the term is over without incurring penalties and fees. With a high-yield savings account, you’ll be able to make withdrawals and transfers up to a certain limit without penalty.
Lower-risk than the stock market. Long-term, you’re likely to see a higher return on investment from the stock market than with a high-yield savings account. But that ROI may not come before some significant short-term losses. High-yield savings accounts are insulated from those risks, making them better for reaching short-term savings goals.
Great for money you’re saving for a rainy day. High-yield savings accounts are great for storing money you don’t need right now, but may need in the near future. A great example is an emergency fund, or funds you’re saving for a house or car.
Perfect for storing a windfall. Whether it’s birthday money from a relative, a wedding gift, or a tax refund, high-yield savings accounts are a perfect place to store your money until you know what to do with it. By the time you’ve figured out how to use it, there’s a chance it may have already grown.
Cons of a high-yield savings account
Not as accessible as checking accounts. Legally, you’re only allowed to withdraw money from your high-yield savings account up to 6 times per month without fees. For that reason, everyday spending money is better stored in a checking account, where you won’t be charged for consistent usage.
More requirements than a traditional savings account. Traditional bank accounts don’t always require you to maintain a minimum balance, but high-yield savings accounts often do. High-yield savings accounts also have withdrawal and transfer limits, which you’re less likely to find with a traditional bank account.
Won’t keep up with inflation. The interest you earn on your high-yield savings accounts will be higher than what you’d get on traditional savings accounts, but it’s still lower than the rate of inflation. For long-term ROI, your money is better stored elsewhere.
You may earn less than advertised. The interest rates on high-yield savings accounts aren’t locked in. So if you see an account offering a high rate, know that that rate is subject to change at the bank’s discretion. That means you may not earn as much as you thought you would going in.
Alternatives to a high-yield savings account
A money market account
A money market account is similar to high-yield savings in that it offers higher interest rates than a traditional bank account. Though money market interest rates tend to be a little lower than high-yield savings interest rates, the benefit to a money market account is that it’s more likely to offer check-writing and ATM access.
Money market accounts are available from banks, credit unions, brokerages, and large financial institutions like Capital One or Goldman Sachs. They're also sometimes called money market deposit accounts (MMDA). The name "money market" comes from the fact that this type of account allows you to keep your funds liquid — meaning you can easily access them — while still earning a decent rate of return on your money.
A CD account
CDs are a type of savings account insured by the FDIC that can help you earn higher interest rates. With a CD, you agree to keep your money in an account for a specific period of time, and in return the bank promises to grow that money at a fixed interest rate. If you withdraw money from your CD before it matures, you'll pay an early withdrawal penalty that could even wipe out the gains from the interest you earned.
CDs typically come in terms ranging from three months to five years, but longer terms give you better returns than shorter ones. Interest rates on CDs can vary widely depending on the term length and type of CD. You'll also see different types of CDs, including regular CDs, jumbo CDs, and IRA CDs. Each one will have different benefits and drawbacks, so be sure to do your research.
Explore savings accounts on Navient Marketplace
High-yield savings accounts are a great way to get a high APY on funds that would otherwise remain stagnant. That makes them one of the best ways to reach your short-term savings goals. With this type of account, you get guaranteed interest earnings, and you won’t have to risk losing any of your hard-earned cash.
If you’re ready to move your money out of your traditional bank account and start growing your savings for real, the Navient Marketplace is a great place to start. This robust online platform has everything you need to learn more about high-yield savings accounts and compare financial products in a convenient one-stop shop. Visit Navient Marketplace today to get started.