Should You Open a High-Yield Savings Account?

couple considering a high-yield savings account

Moving your emergency fund or vacation money into a high-yield savings account can help you make the most of the Federal Reserve’s recent interest rate hikes. Borrowing money costs more these days. But there’s a bright side: Saving money now can earn you a whole lot more than it did at the beginning of 2022.

Is moving your money to a high-yield savings account worth it? To help determine if it’s the right move, keep reading to understand what a high-yield savings account is, how much you could earn and how to open one.

What is a high-yield savings account?

A high-yield savings account is a bank account that offers much higher interest rates than those found at traditional banks. While some brick-and-mortar banks offer high-yield savings accounts, you’re more likely to find the best interest rates at an online bank. According to the Federal Deposit Insurance Corporation (FDIC), the national average for a savings account is .24% as of November 2022. While that doesn’t seem like much, it’s a significant improvement compared to January 2022, when the national average interest rate on savings accounts was only .06%. 

Using a high-interest savings account can earn you even more. Although specific interest rates vary by bank, as of December 2022, high-yield savings accounts range between 3% and 4% based on your location, the bank and the account type. If you search around, you might find rates even higher than that.

It’s better to keep your retirement savings and long-term goals in an investment account where returns are likely to be higher over the long run. But a high-yield savings account is excellent for short-term savings like your: 

  • Emergency fund
  • Travel or vacation fund
  • Down payment on a house or car
  • Home repairs
  • New furniture or technology

Using the higher interest rates offered by online banks to your advantage means that your money is moving toward your goals faster without too much extra effort.

How do high-yield savings accounts work?

High-yield savings accounts work similarly to traditional savings accounts, but they offer a higher return on your deposit. You’ll often find the highest interest rates at online banks or credit unions instead of traditional brick-and-mortar banks. Since online banks don’t have the expenses of a bank with physical locations, they can generally offer higher rates and low or no account fees to their customers. 

Beyond the higher interest rate, these online accounts work like a traditional savings account. You deposit money with the bank, and the bank pays you interest for saving your money with them. This interest is called the annual percentage yield (APY). It’s the actual rate of return you’ll see for keeping your money with the bank for one year if the interest is compounded.

But, keep in mind: Some online banks charge various expenses and fees, like monthly maintenance or minimum balance fees. And most savings accounts are subject to monthly withdrawal limits. You may have to pay a fee for exceeding the monthly limit or not meeting other account criteria.

How much can you earn in a high-yield savings account?

As you research different accounts, ensure you understand how much you can earn with a high-yield savings account over a traditional one.

For example, you had a savings account balance of $1,000 and do not make any additional contributions that year. A traditional savings account with an interest rate of .24% would earn you about $2.40 in 12 months. 

Comparatively, a high-yield savings account offering 3% interest would return around $30 after 12 months with the same account balance of $1,000 and no additional contributions.

While this won’t make you rich, you can earn exponentially more using a high-yield savings account. Even better, interest rates compound over time, meaning that the interest you earn will also earn interest. That $30 you made on your initial balance the first year will earn 3% interest while sitting in your account. 

What Goes Up Must Come Down

Remember that even though interest rates have risen significantly over 2022, they will go down again at some point. This reduction in interest rates is good for people looking to get a mortgage or auto loan since it will cost less to borrow money. Unfortunately, the high interest rate you found at an online bank may also start to slip.

It’s still a smart idea to keep your emergency fund in a high-yield account, even after interest rates decrease. You’ll likely still earn more with an online high-yield account than at some big banks. Some banks tend to set their savings rate around the current national average. Others offer savings rates much lower, with some currently around just .01%. 

That’s one reason why it’s important to know what you’re currently earning and occasionally check the interest rates available with other banks.

How do you find the best high-yield savings account?

Start by researching the best banks offering high-yield savings rates, but don’t just look at the offered interest rates. It’s essential to keep the following in mind as you search: 

FDIC/NCUA-Insured Organizations

Make sure to look for an FDIC-insured bank. If you’re using a credit union, find one insured by the National Credit Union Administration (NCUA). With the FDIC or NCUA designation, the federal government will protect your money up to $250,000 per depositor, per insured bank or credit union against bank failures or theft. 

The bank or credit union will likely list whether they are FDIC or NCUA insured directly on their website. You can also use the FDIC’s BankFind Suite or the NCUA’s search tool to confirm that your chosen bank or credit union is insured appropriately. 

The Initial Deposit

Some banks require a minimum amount to open an account. In contrast, others have a zero-dollar requirement to open an account, allowing you to fund your account over time. Finding a bank that doesn’t require account minimums is usually best for new savers. That way you can save small amounts of money from each paycheck while you build a savings habit. 

Account Fees

Some banks charge monthly maintenance, account minimum, or other fees that can quickly eat away at any interest you earn. Understand the costs your bank charges by reviewing the fee table. It should be included with any paperwork or listed in the bank’s terms and conditions before opening an account. 

Minimum Balance Requirements

To earn the interest best rate, the bank may require you to keep a minimum balance in your account at all times. Some banks and credit unions tie the APY you earn to your account balance. Others may provide an advertised APY across the board, no matter how much you have in the account. If you’re worried about keeping the minimum balance, search for a bank or credit union that doesn’t have minimums and offers a general APY across all accounts.

Customer Service Reviews

Read up on what current bank customers are saying. Since these banks are generally online only, it’s essential to be aware of reports of hard-to-reach customer service representatives or unsatisfactory resolutions to problems since you can’t just pop into a local branch for assistance. 

Access to ATMs

If you’re prone to impulse buys, you don’t want to make getting into your savings too easy. Though, you do need to know how to withdraw your money when the time is right. Research if the online bank has ATMs near you, what fees they charge or if the only way to access your funds is through a linked bank account or by wiring money. 

How do I open a high-yield savings account?

You can open a high-yield savings account online or in person, depending on the bank and the type of account you want. Be prepared to provide personal information like: 

  • Full name
  • Birthdate
  • Address
  • Email address
  • Phone number
  • Social Security number
  • A copy of your driver’s license or other government-issued ID

If you plan to open a joint account, you’ll also need to provide this information for your partner.

Once the initial account is open, set up your communication preferences, username and password so you can manage your account from your phone or desktop computer.

Then, link the primary bank account you’ll use to fund the account and set up the initial deposit. 

It’s also a good idea to set up biweekly or monthly deposits (depending on how you get paid) into your high-yield savings account so you can put your savings on autopilot. 

Bottom Line

The best high-yield savings accounts can help you grow your money faster than the national average. Do your research, and use an online calculator to help you discover how much you could make using a high-yield savings account. With a little effort, you will find the account that best meets your savings needs and goals. 

Photo by Ground Picture/Shutterstock

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