Everything You Need to Know About a High-Yield Savings Account
What is a high-yield savings account?
A high-yield savings account is exactly like a regular savings account, except you receive higher interest rates (or yield) on your money. That’s it.
Most banks offer around a 0.02% interest rate. That’s not even close to keeping up with inflation.
So, if you have $10,000 in savings, you’ll get about $2/year in interest.
If you have your money in a high-yield savings account with 4% interest rate, you’ll make $400!
You do no extra work. You just make more.
Now, historically, high-yield savings accounts were offered by online banks that didn’t have brick-and-mortar locations. Since they didn’t have the costs of running branch locations, they were able to pass those savings onto customers by offering higher interest on their savings.
This is changing a bit, as the big companies work to catch up, but many of the best deals still lie with online-only banks.
How to choose the best high-yield savings account
There are a couple things to look for before opening up your first high-yield savings account.
1. What’s the APY (annual percentage yield, i.e. the interest rate)?
Of course, the first and most important thing to look for is the interest rate. You want to make the most money you can, so shop around for the highest interest rates. As of 2024, it’s common to see interest rates between 4-5%.
2. Are there any fees?
Next, you’ll want to check for fees. It’s total BS to pay for things like:
Minimum balances: some banks will make you keep a specific amount in the account, or pay the service fee. It will say something like: $5 monthly service fee can be avoided by keeping a minimum balance of $500 in your account. (Boo!)
Inactivity fee: a fee you pay if you haven’t made any recent transactions in the account. Look for something that says: $20 fee can be avoided if you make 2 transactions per month or schedule an automatic transfer. (It’s a savings account - it’s a good thing if you’re leaving your savings alone!)
Overdraft fee: overdraft is when you spend more than your account balance. Basically, you have negative dollars. Instead of declining your debit card and saying “Hey, sorry, but you don’t have enough money for this transaction” the bank will allow the transaction to go through, but then charge you a fee for overspending on your account. While it’s best not to make a habit of overdrafting your account, life happens sometimes, and you shouldn’t have to pay a fee for it.
3. Is there a minimum deposit to open it?
Some banks will have a minimum deposit in order to open a high-yield savings account. This doesn’t necessarily mean the bank is a bad choice, but if you can’t afford the $1,000 minimum deposit, it could prevent you from opening an account.
4. Will online-only work for you?
Online-only banks often have the best deals on APY, but will an online-only bank work for you? Most of us do banking online these days anyways, but is there a reason you may need to visit a brick-and-mortar bank?
Also, if you keep your savings with an online-only bank and your checking account with another bank, you’ll need to remember that transfers take a few days, meaning your money is less accessible. Generally this is a good thing, because it means you can’t spend that money on impulse, but it does make it less convenient to access when you need the money.
Will my money be safe?
Another important thing to look for with your high-yield savings account is that the bank is FDIC insured.
The FDIC (Federal Deposit Insurance Corporation) is basically government insurance that your money is safe. If the bank is FDIC insured, it means the United States government will ensure that if the bank fails, you will get all of your money back (up to $250,000).
This information should be very easy to find on the bank’s webpage. Just scroll to the bottom of their homepage and it usually says something like “Accounts are FDIC insured up to $250,000”. If you can’t find it just do a search for “Bank name FDIC insured”.
High-yield savings account v. investments
Now, the next question is: how should I use my high-yield savings account?
While high-yield savings accounts are great for keeping things like your emergency savings, they are not wealth-building vehicles. A 4% return on your emergency savings is awesome, but a 4% return on your retirement savings? Not so much.
It’s important to differentiate between savings and investments.
Your high-yield savings account should be used to store your savings. This means: any money that you may need to use in the next 5 (ish) years.
Examples of savings:
Emergency savings
Travel savings
Down-payment for a house
Savings for a new car
A wedding
Paying off debt
If you will not need that money in the next 5 years, it should be going into investments. For most people, this means their retirement.
You should not be keeping your retirement savings in a high-yield savings account. This should be in a tax-advantaged retirement account like a 401k or Roth IRA.
Other things to know
It’s important to know that interest rates can change in your high-yield savings accounts. Rates vary depending on market conditions, so although you might be making 4.5% when you open the account, you could be making 3% later.
Still, any amount of interest you earn from a high-yield savings account will be better than the 0.02% you earned at your previous bank.
Final Thoughts
A high-yield savings account is an incredible tool for growing your money with no extra effort from you!
Once you open up the account and set up your transfers, you’ll be earning hundreds of dollars more, helping your money grow and helping YOU reach your goals even faster.
Action Steps
Find a high-yield savings account that works for you. Do a quick search online for “Best High-Yield Savings Accounts” to find a list. Remember to check that the bank is FDIC insured and that you won’t be paying any BS fees.
Fund your account and set up automatic transfers to your savings so your money can GROW!
Close your old savings account! Your old bank is definitely going to make it hard for you to close the account. But get on the phone, and tell them you’re switching banks because their interest rates suck.
Celebrate! You’re now making more money on your money with literally no extra effort. Keep killing it!
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
