What is a high yield savings account?

A high-yield savings account is one of the best ways to effortlessly boost your savings and achieve your financial goals faster. High-interest savings accounts pay higher interest rates compared to traditional savings accounts, come with lower fees, and provide you with 24/7 access to your funds. Additionally, online savings accounts are insured by the Federal Deposit Insurance Corporation(FDIC) for bank accounts and the National Credit Union Administration(NCUA) for credit union accounts up to $250,000 per insured account which protects your hard-earned money.

Whether you are looking for safer ways to deposit your funds while earning competitive rates or are interested in alternative ways to diversify your investment portfolio, a high-yield savings account could be your best choice.

Here is everything you need to know about high-yield savings accounts.

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What is a high-yield savings account?

A high-yield savings account is a savings account that pays a higher interest rate than traditional savings accounts. These accounts are typically offered by online banks, credit unions, and other financial institutions.

Online high-yield savings accounts have gained popularity in recent years due to their advantages over traditional options. They offer higher interest rates, often ten times higher than brick-and-mortar banks rates, allowing your money to grow at a faster pace. Additionally, online accounts tend to have lower fees and banking flexibility, making them more accessible and cost-effective.

How does a high-yield savings account work?

When you open a high-yield savings account, you deposit money into the account, just like you would with a traditional savings account. The difference lies in the interest you earn on that money. With a high-yield savings account, the interest rate is typically much higher than what you would find with a regular savings account. This means that your money has the potential to grow at a faster rate.

The interest earned on a high-yield savings account is usually calculated on a daily or monthly basis, and it is compounded. Compounding means that the interest you earn is added back into your account, allowing you to earn interest on both your initial deposit and the interest you have already earned. This compounding effect can significantly boost your savings over time

High-yield savings accounts also offer more flexibility and accessibility of your funds. You can quickly transfer money in and out of the account as needed. This means that you can access your funds whenever you need them without incurring any penalties or fees. Keep in mind that most savings accounts allow you to take money out of the account up to six times per month without penalty and fees, according to Select.

In addition, high-yield savings accounts are protected by Federal Deposit Insurance Corporation (FDIC) insurance, which means that your deposits are insured up to $250,000 per depositor, per insured bank. This provides you with peace of mind knowing that your money is safe and secure.

Online high-yield savings accounts vs. traditional savings accounts

Online high-yield savings accounts and traditional savings accounts offer distinct advantages and considerations for savers. High-yield savings accounts are provided by online banks credit unions, and other financial institutions, offering a convenient and accessible way to save money.

By leveraging technology, High-yield savings accounts provide customers with a user-friendly digital interface. You can easily access your account, check your balance, and make transfers from the comfort of your own home or wherever you have an internet connection. This flexibility is particularly appealing to those who prefer the convenience of managing their finances online or are constantly on the go.

In contrast, traditional savings accounts are typically offered by local banks and credit unions provide a more familiar banking experience. If you prefer face-to-face interactions and value the convenience of having a physical branch nearby, a traditional savings account may be more suitable for you. However, these accounts generally offer lower interest rates compared to their online counterparts.

Here are the key differences between a high-yield saving account vs. a traditional savings account

The key differences between online high-yield savings accounts and traditional savings accounts lie in their accessibility, interest rates, and customer service options.

High-yield savings account. These accounts provide 24/7 access to your funds, competitive interest rates, and streamlined digital experiences. Online savings accounts can earn you as high as 5% APY.

Traditional savings accounts. These accounts offer in-person customer service and the comfort of having a physical location for your banking needs. However, they offer relatively lower interest rates compared to online high-interest savings accounts. Traditional savings accounts also come with higher fees compared to online savings accounts. According to Bankrate, the average APY for traditional savings accounts is currently at 0.56% APY.

Benefits of a high-yield savings account

If you want to save for your financial goals and want the safety of your money while earning a higher interest rate, a high-yield savings account will be a great option for your savings.

Here are the pros of a savings account and what you should expect from opening one.

You will have access to your funds 24/7 which makes them more accessible and easy to manage your funds effortlessly from anywhere.

You will earn a higher interest rate compared to what you would get with traditional savings accounts.

A high-yield savings account allows you to do all activities online such as deposits and transfers or making payments.

Your funds will be FDIC-insured when you open an account with an online bank and NCUA-insured when you open an account with an online credit union up to $250,000.

You will enjoy great customer service and educational resources to help you manage your funds.

Disadvantages of a high-interest savings account

While there are many advantages of online savings accounts, they also come with disadvantages that should not be ignored.

Here are the disadvantages of high-yield savings accounts.

Online savings accounts do not offer the traditional face-to-face banking experience-meaning you cannot visit a branch to make a deposit. Everything is solely done online.

Many online savings accounts require a higher minimum deposit when opening an account

Since everything is done online, you cannot deposit cash in your account

High-yield savings accounts might not be a great choice if you are not good with technology

ATM networks might also be limited for online savings accounts

How to choose the right high-yield savings account?

Just like any other deposit account or investment, you should also do your due diligence when opening a high-yield savings account. Here are things to look for when choosing an online savings account.

Pick an account with a high-interest rate. The biggest advantage of online savings accounts over traditional counterparts is the ability to earn more money. Online banks also do not offer the same rates-meaning you can earn more or less depending on the rate of your institution. To maximize your ROI, look for accounts with competitive interest rates.

Don’t forget the fees. While high-yield savings accounts typically have fewer fees compared to traditional banks, it’s still crucial to check for any monthly maintenance fees, transaction fees, or minimum balance requirements. Ideally, you want to find an account with little to no fees, ensuring that your hard-earned savings aren’t being eaten away by unnecessary charges.

Evaluate the accessibility and convenience of the account. You need to evaluate the bank’s online and mobile banking capabilities as all activities will be conducted online. Look for features such as easy fund transfers, bill payment options, and the ability to link your savings account to other accounts you may have. Having a user-friendly interface and a seamless digital experience can make managing your savings effortless and enjoyable.

Open a high-yield savings account from an established institution. Research the bank’s financial stability, customer reviews, or awards they may have received. A trustworthy institution will give you peace of mind knowing that your savings are in good hands.

Consider other benefits. Some banks offer rewards programs, ATM fee reimbursements, or even financial education resources to help you make the most of your savings. While these may not be the deciding factors, they can certainly enhance your overall banking experience.

Make sure your online bank is FDIC/NCUA insured. Before you open a high-yield savings account, make sure that the institution is insured. Without this insurance, there won’t be a guarantee of your funds’ protection.

Can you build wealth with a high-hield savings account?

When it comes to building wealth, there are countless strategies you can rely on. But, all these strategies rely on your ability to earn more money in less time by strategically investing the money you make to earn extra income and allow your funds to grow through compounding effects.

The question is, can you build wealth with a high-yield savings account alone? The quick answer is no.

While high-yield savings accounts earn you higher returns compared to traditional savings accounts, the turn on these accounts is not enough to help you build wealth. This is because these returns are also lower compared to what you can earn from other investment alternatives.

According to Investopedia, the best high-yield savings account from any institution in the U.S. market is currently at 5.26% APY. While this rate is higher than most deposit accounts, it is not the best ROI you can get from other investments. For example, according to Nerdwallet, the average return on the stock market is 10% over the past century. If you invest your money in the highest paying high-yield savings account, you will earn half of what you could have earned from the stock market. This is just one example. Other investment alternatives such as bonds, real estate, ETFs, etc, also earn more compared to high-yield savings accounts.

Another factor to consider is the inflation rate. Most high-yield savings accounts earn relatively lower rates compared to the inflation rate. Meaning if you only put your money in a savings account, you will lose purchasing power over time.

Use a high-yield savings account as part of your investment strategy

High-yield savings accounts can help you diversify your investments. Instead of relying on a savings account alone on your wealth-building journey, consider alternative investments such as ETFs, mutual funds, stocks, and real estate. While these investments come with relatively higher risks, they also offer greater returns compared to savings accounts.

This does not mean a savings account cannot help you build wealth. By diversifying some of your funds into high-yield savings accounts, you get a higher rate, easy access to your funds, and protection of your funds from risk through FDIC/NCUA insurance.

So, treat a savings account as part of your investment portfolio instead of the portfolio.

Is a high-yield savings account a good idea?

If you want to keep your money safe while earning you a higher return, a high-yield savings account can be a smart choice.

When does it make sense to open a high-yield savings account?

The following are reasons why you should open a high-yield savings account.

Competitive rates. One of the key advantages of a high-yield savings account is the potential for faster savings growth. With higher interest rates, your money can compound more quickly, helping you reach your savings goals faster. This can be beneficial if you are saving for a specific purpose, such as a down payment on a home or a dream vacation.

Protection of your hard-earned money. Opening a High-yield savings account is a good idea due to the protection offered by Federal Deposit Insurance Corporation (FDIC) insurance, meaning that your deposits are insured up to $250,000 per depositor, per insured bank.

You still have the flexibility and full access to your funds. Unlike other types of investments that may have restrictions or penalties for early withdrawal such as retirement accounts, these accounts allow you to easily withdraw funds without incurring any additional costs.

High-yield savings accounts are great for emergency funds due to their accessibility

You want to diversify your portfolio. Online savings accounts can offer you the diversification you need to maximize your return on investments while protecting your funds at the same time.

When should you avoid high-yield savings accounts?

High-yield savings accounts are not great options for long-term saving goals. While online savings accounts earn higher APY compared to traditional accounts, their rates are not enough to beat inflation. Meaning, if you keep your money in a savings account for a long time, you will lose your purchasing power.

Additionally, if you have money you don’t need for a while, it will be best to put your money elsewhere. When it comes to investing, risk, and rewards are always the opposite. The safer the investment, the lower the tips. That is why most deposit accounts such as savings accounts, certificates of deposits, and money market accounts come with a meager return.

On the contrary, the higher the risk, the more potential for higher returns. That is why stocks, real estate, and ETFs offer higher returns. So, if you have the money you don’t need and are ok to take on more risk, it will be best to invest the money where the return is greater.

How much does a high-yield savings account make?

When it comes to the potential earnings of a high-yield savings account, it’s essential to understand the factors that influence the interest you can earn.

1. Annual Percentage Yield (APY)

One of the key elements affecting your earnings is the annual percentage yield (APY) offered by the financial institution. Expressed as a percentage, the APY is the total amount of interest you earn on your account balance over a year. Different banks and credit unions may offer varying APYs. So, it’s worth comparing rates to find the most competitive option available.

2. The frequency of compounding

Compounding refers to the process of earning interest on both the initial deposit and the accumulated interest. The more frequently interest is compounded, the more your savings will grow over time. Many high-yield savings accounts compound daily or monthly basis. Daily compounding can maximize your earnings as it calculates interest daily, helping your savings grow at a faster rate. Monthly compounding, on the other hand, calculates interest every month, which may result in slightly lower overall earnings.

To give you an idea of the potential earnings, let’s consider a hypothetical scenario. Suppose you deposit $10,000 into a high-yield savings account with an APY of 1.5% compounded daily. After one year, your account balance would be $10,156.25, with total interest earned amounting to $156.25.

So, how much can you make with a high-yield savings account?

Many online banks and credit unions offer APYs that are over 4% which is much higher than the national average savings accounts APY of 0.56%, according to Bankrate’s Aug. 14 weekly survey of institutions. For example, CitiBank is currently offering 5.05% APY on its platinum Savings on balances over $5,000. With this savings account, you should expect to make about $530 in interest over one year if you invested $10,000, your claim is compounded daily, and you contribute $50 per month.

Besides compounding schedules and APY, your return on investment from an online savings account will also depend on your balance. The higher your savings balance, the more you will earn from a high-yield savings account.