One of the best places to store money safely is a high-yield savings account. Learn more about this type of deposit account so you can pick the best one for your situation.
A high-yield savings account offers a better-than-average annual percentage yield compared with all savings accounts. According to the FDIC, the average APY across all savings accounts as of August 21, 2023, was 0.43%. At the same time, there were a number of high-yield savings accounts offering APYs of 2.5% and higher. The best CD accounts also offer a place to earn competitive APYs.
While the banks and credit unions that market high-yield savings accounts offer interest rates many times higher than the national average APY, there’s a reason the average is so low in the first place. Many national banks offer an APY of only 0.01% on their savings accounts. That’s the case for JPMorgan Chase Bank, Bank of America and Wells Fargo Bank – three of the largest U.S. banks.
Over one year, $1,000 stored in a savings account with a 0.01% APY will earn 10 cents of interest. If the savings account has an APY of 2.5%, the same $1,000 will earn $25.
Savings accounts don’t have fixed rates. The rates are variable, and a bank can change its savings account interest rate at any time. Rates don’t bounce around, though. Instead, they generally move in concert with the federal funds rate, a target interest rate the Federal Reserve sets.
Lowering interest rates makes it cheaper for governments, businesses and individuals to borrow money, which then should stimulate the economy. Raising interest rates are supposed to tamp down inflation. During the Great Recession, the Fed lowered the federal funds rate to a range of 0%-0.25%. At the start of the coronavirus pandemic in 2020, the Fed once again lowered interest rates to the same 0%-0.25% target. While this is good for borrowers, it isn’t great for savers. In 2022, the Fed started raising rates again.
Find the Banking Product That’s Right for You
You need to evaluate a few things to find the best high-yield savings account for you. Ask these questions as you compare account options:
- APY. What annual percentage yield will your money earn? The higher the percentage, the better.
- Account minimum. Is there a required minimum balance you need to maintain in your high-interest savings account to earn interest or avoid fees? Is the APY tiered? In other words, does the account only hit the high interest rate with a high deposit balance?
- Fees. Does the bank charge monthly maintenance fees? If it does charge fees, how onerous is it to avoid them?
- Other factors. How many withdrawals are permitted per month? How easy is the sign-up process? What can you do from the bank’s app?
The best high-yield savings accounts, typically offered by online banks, have high APYs, low account minimums, no fees and robust mobile banking platforms. When you’re looking for a high-yield savings account, it doesn’t pay to settle.
Once you’ve found a high-interest account you like, it’s time to actually deposit money into it. This is a straightforward process. The easiest way to open an account is online, from the bank or credit union’s website. Here’s how to do it:
- Meet the minimum requirements. To open a new savings account, you’ll need to be 18 or older, have a home address in the United States, and have a valid Social Security number or tax identification number.
- Supply personal information. Click “open account,” and start by entering your personal information, including your name and birthdate. Because you aren’t applying for credit, the bank won’t check your credit score.
- Accept terms and conditions. Click through to agree to the bank’s terms and conditions for opening an account.
- Fund the new account. Once you connect an existing account to your new account, you can transfer money into your new savings account. To keep growing your savings account, consider setting up automatic transfers.
Can You Lose Money in a High-Yield Savings Account?
Another reason that high-yield savings accounts are safe is that your balance can’t go down. Even if you only ever make one deposit, that money will keep growing at the stated APY.
Opening a high-interest savings account has plenty of benefits, but there are some downsides, too. See how the pros and cons compare so you can make an educated decision.
Pros
- Your money is liquid. If you store money in a high-yield savings account, you can still access and withdraw it at any time. That’s why a savings account is a good place to keep your emergency fund – if you have a surprise expense, you can use it right away.
- Your money is growing. Thanks to their higher APYs, high-interest savings accounts will grow your money – especially compared with a traditional savings account.
Cons
- Other investment options offer better returns. While your money might be growing in a high-yield savings account, it still isn’t growing very fast, especially compared with other methods of investing. In the past 10 years, the S&P 500 has had an average annual return of 11.25% (and that’s including the 22% drop in the index in 2022). An APY of 2.5% in a high-yield savings account doesn’t compare that favorably.
- There are withdrawal restrictions. The Federal Reserve Board used to restrict savings account withdrawals or transfers to six a month, with certain exceptions. In April 2020, the Fed announced an interim rule to waive the limit to help people access needed funds during the pandemic. Even though the limit continues to be waived at the federal level, banks and credit unions have applied it unevenly in practice. Some banks have maintained the six-withdrawal limit, while others have raised it to eight or nine a month. Others have eliminated it completely. Check what the limit is for your bank or credit union.
A high-yield savings account is a great way to store your money safely, but it isn’t the only way. These are some alternatives:
- A traditional savings account. Instead of a high-yield savings account, you can always open a traditional savings account. If you opt to open an account at a brick-and-mortar bank, you’ll be able to visit a local branch to ask questions or make deposits or withdrawals in person. The downside is that you’ll be getting a much lower APY.
- A certificate of deposit account. With a certificate of deposit, you lock in a fixed APY for the length of the term. CD rates are usually higher than savings account rates, too. Online banks have especially competitive CD rates. The trade-off for higher rates is money that is less liquid. Most CDs charge a penalty if you withdraw your money before it reaches maturity. CD rates are also tiered, meaning you’ll only get the best rates if you put your money away for the longest period of time.
- A money market account: Add check-writing abilities to a savings account and you have a money market account. With a money market account, you’re likely still limited to six transfers or withdrawals. Some money market accounts also have minimum balance requirements.
Online banks are a good option for high-yield savings accounts because they consistently offer competitive rates. Online banks can do this because they have much lower overhead than traditional banks with physical locations (frequently called brick-and-mortar banks). Online banks don’t need to pay real estate costs or hire tellers and branch managers. Instead, they can pass these savings on to their customers, in the form of higher interest rates.
If your bank is insured by the FDIC or your credit union is insured by the National Credit Union Administration, then your savings are federally insured to at least $250,000. It’s important to confirm that the savings account you select is federally insured, but rest assured that the vast majority are. This means that in the unlikely event your bank goes under, you won’t lose the money you saved.
High-yield savings account interest rates can and do change. Beginning in the fourth quarter of 2021, inflation started to rise dramatically, and it has continued to rise throughout 2022. In response to this, the Fed has made significant increases to the federal funds rate in 2022, and it plans to continue raising rates into the next year. This means that high-yield savings account rates have also risen.
Choosing the right savings account can be a key step in making your money work for you. To determine our Best Savings Accounts, we look for factors beyond just interest rates that can make or break the right account, including minimum balance to earn interest, transaction limitations and monthly fees. See our full methodology.
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