If your finances are feeling the hit from the COVID-19 pandemic — and subsequent recession — you’re not alone. Most folks would say that if there was an easy option to grow their savings, they’d take it in a heartbeat. Yet, research from Insider Intelligence shows that more than half of Americans are missing out on additional earnings by not utilizing high-yield accounts.
Thanks to recent Federal Reserve interest rate increases, the average annual percentage yield (APY) on high-yield savings accounts has gone up — from 0.5% in early 2022 to more than 3% at the end of 2022. But not everyone’s taking advantage. According to a 2021 survey from the Federal Deposit Insurance Corporation (FDIC), nearly 6 million households didn’t have a savings account at all. And NextAdvisor’s research shows that only 21% of Americans report taking advantage of high-interest savings accounts — something many personal finance experts believe is a missed opportunity. Here’s why.
What are high-yield savings accounts?
A high-yield savings account is one of the best tools for reaching your short-term financial goals. Essentially, it's a type of savings account that pays interest on the funds you deposit. The amount of interest you earn depends on the bank and your deposit balance, but high-yield savings accounts tend to pay 15 to 25 times more interest than traditional savings accounts. What’s more, high-yield savings accounts tend to be more reliable than investing your money in the stock market, for example, and more flexible than putting it away in a CD (Certificate of Deposit) account. If your goal is maximizing your returns in a low-risk environment where you can easily access your money at any time, a high-yield savings account may be for you.
Benefits of a high-yield savings account
High-yield savings accounts have higher interest rates than traditional savings accounts. When it comes to your savings, the higher the interest rate, the better. Most high-yield savings accounts boast interest rates up to 25 times higher than traditional accounts. And even an increase in a single percentage point can translate to a significant sum over the course of a year.
High-yield savings accounts are flexible. Unlike other accounts that offer high rates of return, a high-yield savings account doesn’t require you to lock your money in for a set term. For example, a CD account will offer similar interest rates, but will charge an early withdrawal fee if you take money out before the end of the term. A high-yield savings account is different in that there are no penalties if you make a withdrawal. (You may, however, be limited in the number of withdrawals and deposits that you can make over a set period of time.)
High-yield savings accounts are better for meeting short-term savings goals. If you’re trying to make a big purchase within the next five or so years — like putting a down payment on a car or house — high-yield savings accounts represent a lower-risk alternative to other investment options, like stocks, which can lose value in that time.
High-yield savings accounts are perfect for an emergency fund. A high-yield savings account is an ideal place to store funds that you don't need immediately, like an emergency fund. You'll earn interest on your money and be able to withdraw it at any time.
High-yield savings accounts are great for storing a windfall. When you get a tax return or a stimulus check, it can be tempting to spend it, even if you don’t have a pressing need. If there’s no expense that requires your immediate attention, why not put it in a high-yield savings account? When you do finally have a reason to spend it, there’s a chance it may have grown even bigger.
Drawbacks of a high-yield savings account
High-yield savings accounts are not ideal for everyday banking. Federal law allows you to withdraw money from a high-yield savings account up to six times in a single month without paying fees. To avoid paying fees, your everyday cash is best stored in a checking account, while money you won’t need immediately, like an emergency fund, is better kept in a high-yield savings account.
High-yield savings generally have stricter requirements than standard savings accounts. Along with transfer and withdrawal limits, higher initial deposits and minimum balances are just a few examples of policies you aren’t likely to face with a traditional savings account.
High-yield savings accounts are not the best for long-term goals. Though you’ll earn more interest than you will with a traditional savings account, interest earned in a high-yield savings account likely won’t even be enough to keep up with inflation. If you’re saving for retirement, for example, there are better investment vehicles out there.
High-yield savings accounts are fluctuating. Interest rates aren't guaranteed. While your money is safe in a high-yield savings account, the bank can change your interest rate at any point. There are no federal regulations that protect you from a lower interest rate if rates go down, so you could earn less than advertised.
How does a high-yield savings account work?
Many financial services institutions offer high-yield savings accounts, including traditional banks, some credit unions, and online banks. For the most part, these accounts work just like traditional savings accounts: you can make direct deposits, withdraw cash, and manage your accounts through the bank’s website or mobile app. Where high-yield savings accounts differ is in the interest rates, which tend to be higher than those on regular savings accounts. High-yield savings accounts also have more restrictions on how often you can withdraw your money.
Opening a high-yield savings account
If your existing bank offers high-yield savings accounts, applying for one is simply a matter of logging into your online banking portal. The application process typically takes ten to fifteen minutes.
If you’re opening a high-yield savings account with a new bank, the application may take more time. You can either walk into a brick-and-mortar bank or apply for the account online. You’ll likely be asked to provide personal information and documents, including your:
Legal name
Official identification document, such as a driver’s license
Social Security Number
Date of birth
Address
Primary bank account information
You may also be asked to make an opening deposit once your account is active.
Withdrawals and transfers
Some financial institutions require a minimum deposit of $100 or more to open a high-yield savings account. Once that’s done, you can withdraw cash or make electronic or wire transfers, but only up to six times per month. This is due to a federal law known as Regulation D. Regulation D was lifted during the Covid-19 pandemic, but some banks still adhere to the six-withdrawal limit. If you withdraw too often, the bank or credit union can convert your account into a checking account.
APY
Annual Percentage Yield (APY) is the interest you earn on your money. Unlike with traditional bank accounts or online savings accounts, rates on high-yield accounts tend to exceed the national average. They also use a type of interest called compound interest. That means that any interest you make will be tacked onto the amount of money you initially deposited. You’ll then make future interest on that full amount. Compound interest is one of the best ways to grow your money fast.
How to pick a high-yield savings account
To find the best high-yield savings accounts, you’ll need to understand the nitty gritty of how they work. Here’s what to watch for.
Interest rate
The higher the APY, the more money you earn on your savings. This is the most important factor in opening a high-yield account, so be sure to ask all the right questions. Here are a few of the big ones:
Have you shopped around with other financial institutions to make sure you’re getting the highest rate?
If you’re eyeing a high APY, have you read the fine print? Is it just a promotional rate that will expire?
Will you need to maintain a certain minimum balance to earn those higher rates?
What will your annual interest earnings actually be?
How frequently is your interest compounded?
Minimum balance requirements and initial deposit
Different banks have different opening deposit requirements. Many also require you to maintain a minimum sum within the account to keep it open. Make sure this is an amount you feel comfortable with, since going below the minimum threshold can trigger fees or lower your interest rate.
Fees
Another big consideration with high-yield accounts is fees. After all, what’s the point of earning more on your savings if you’re going to pay it all out in monthly fees? Look for high-yield savings accounts that don’t charge monthly maintenance fees. You’ll also want to look out for any monthly service fees the bank or credit union might charge for going below the minimum balance, exceeding the six-withdrawals limit, or going into overdraft.
Provider
A number of big national banks such as Marcus by Goldman Sachs, CapitalOne, and American Express all offer high-yield savings accounts. If you already bank with one of these providers, you might consider opening your new account with them. This can streamline your online banking and make it easier to see all your accounts in one place.
If you’re unhappy with your current bank or think you can find a better interest rate elsewhere, however, it may be better to find a new provider. Make sure any financial institution you consider is a member of the FDIC and/or National Credit Union Association (NCUA), both of which protect you against bank failures. (Look for “Member FDIC” or “member NCUA” on their website to make sure.)
Alternatives to a high-yield savings account
High-yield savings accounts aren’t for everyone. Here are some alternatives worth considering.
A money market account
Money market accounts are similar to high-yield savings accounts in that they’re FDIC-insured and their interest rates often exceed regular savings account rates. You can deposit cash and make ATM withdrawals. One big difference is that many money market accounts also provide a debit card and allow you to write checks, which can make them a better choice for those who prefer to pay their bills manually. (Disclaimer: you’ll only be able to write up to six checks per month, as mandated by Regulation D.)
A CD account
A CD is another useful tool for short-term financial planning. It’s a type of investment account that locks up your money for a specific period of time — often three to five years — at which point you can withdraw it along with any interest earned. In the interim, however, you’re not allowed to touch your savings. High-yield savings accounts don’t have these restrictions: they operate much like regular deposit accounts, allowing you to make deposits and withdrawals as needed while also offering higher rates than traditional savings accounts.
Though you won’t be able to access your money in a CD account for the length of the term, you’re likely to earn more in interest over that term than you would have with a high-yield savings account. Rates are also fixed with a CD account, not fluctuating like a high-yield savings account, so it’s a more predictable return on investment.
Explore savings accounts on Navient Marketplace
High-yield savings accounts are one of the best tools for protecting and growing your savings without sacrificing access to your money. Because they offer higher interest rates than you might find on a traditional savings account, they’re a great way to close the final gaps to reach your short-term financial goals.
You can open a high-interest savings account with any number of financial institutions, but each offers different rates, fees, and minimum balance requirements. To rate-shop efficiently, consider using Navient Marketplace, a powerful online platform that lets you browse some of the best banks in the business. Use it to shop around, compare rates, and find the best high-yield savings account for you.