What Is a High-Yield Savings Account?

Opening a savings account is a smart move, but if you really want to maximize your money, you should open a high-yield savings account. High-yield savings accounts net you significantly better returns than you’ll get with a run-of-the-mill savings account.

According to the FDIC, the average savings rate is currently 0.46%, and at big banks, it’s even worse -- as low as 0.01% annual percentage yield, or APY, in some cases. Some banks offer high-yield savings accounts that pay 5% APY or more -- a whopping 500 times higher.

If you’re ready to boost your savings exponentially, read on to learn more about how high-yield savings accounts work and what to consider before you open one.

A high-yield savings account is a low-risk savings option that pays a higher APY on deposits than a traditional savings account. You can still deposit your money regularly (within your bank’s limits), all while earning interest on your contributions. There’s no real risk, either. These accounts are protected at federally insured banks and credit unions for up to $250,000 per person, per account in case of a bank failure. 

However, you won’t find many high-yield savings accounts at traditional major banks. Most are provided by online-only banks. These banks can offer better savings rates because they don’t have overhead costs, such as maintaining physical branches, so they can pass some of those savings down to their customers. 

“Offering a higher yield promotes longterm parking of the money with the financial institutions, which is a benefit for them,” said Jamilah McCluney, a fiduciary and financial planner at Black Wealth Financial. 

Your account APY reflects your savings interest rate and the compounding frequency. A higher APY means you’ll earn more interest on your money. Currently, the best high-yield savings account rates are around 5% APY. However, savings rates are variable, so they can change at any time. We’re already seeing APYs fall since the Federal Reserve cut interest rates in September.

Still, a high-yield savings account is still an ideal place to store and grow an emergency fund. “This could be a few thousand dollars or even tens of thousands of dollars, and it’s money you shouldn’t be using unless you absolutely have to,” said Kali Roberge, chief operations officer at Beyond Your Hammock.

Whether a high-yield savings account is right for you depends on your savings goals. It’s ideal for an emergency fund because it allows you to access your money anytime without penalty, as long as you mind any withdrawal limits.

However, if you can afford to leave your money untouched for an extended period, you may be better off with a certificate of deposit. CDs rates are often similar to savings rates, and your APY is locked in when you open the account. 

Consider these factors when choosing a high-yield savings account:

APY: High-yield savings accounts offer considerably better rates than traditional savings accounts, but rates vary from bank to bank. Some banks offer APYs on all balances, while others offer the best APYs only if you fulfill certain balance requirements. Take the time to compare multiple offers to find the account with the best rate for your needs. Accessibility: Most online banks don’t have physical branches, so it’s important to find a bank that offers convenient, easy access to your funds. Depending on how you prefer to do your banking, this could include looking for features like mobile check deposit, cash deposit options or an ATM card. Fees: Overdraft, monthly maintenance and other fees can eat into your savings. Many high-yield savings accounts have low or no fees, but you should still check a bank’s fee structure before opening an account. Initial deposit and balance requirements: Most high-yield savings accounts don’t require a minimum deposit or balance to remain in good standing. But it’s best to check with the bank to make sure you’re comfortable with any thresholds it may have. Compounding period: The compounding period is how frequently the bank calculates interest. Typical periods are daily, monthly and quarterly. The more frequent the compounding period, the more interest you’ll earn. Transfer limit: Some banks have daily withdrawal and transfer limits you should watch for if there’s a chance you’ll need to withdraw a large lump sum. ”If, for example, you need $20,000 to buy a used car, you want to be able to transfer all that money from your savings without any limitations,” said Alvin Carlos, a certified financial planner at District Capital.

As long as your high-yield savings account is held at an institution insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration, it’s protected up to $250,000 per person, per account. That means you won’t lose money under this threshold if the bank or credit union fails.

Your principal balance and any interest you’ve earned to date are also safe. While you may earn less interest in the future if rates go down, you won’t lose any of the money you already have in your account. This makes a high-yield savings account a safer place to put your money than investments like stocks, where you could lose a significant amount overnight.

When you’re ready, opening a high-yield savings account takes only a few steps. Here’s how to do it:

Compare your options: Look at banking features, fees and limitations that can impact how you manage your account, such as an online app or special savings tools.  Gather the necessary information: Banks may require your Social Security number, physical address, email, phone number and other personal information to get started. If you’re applying online, it typically takes a few minutes for the bank to approve your application and open your account.  Fund the account: Make your first deposit into your savings account via electronic transfer, direct deposit or by other means your bank accepts. Some banks may require a minimum deposit when you open your account. 

In addition to high-yield savings accounts, there are other high-yielding options for storing and boosting your savings. 

A CD lets you make a one-time deposit and gives you a fixed interest rate in exchange for keeping your money in the account for a set period, or term. Common terms range from three months to five years. You generally earn a higher interest rate the longer your term, although currently, short-term CDs are offering better APYs.

The downside is that you’ll lose any or all accrued interest if you withdraw your funds from the CD before its term ends.

A money market account is a blend of a checking and savings account. It allows you to earn a higher interest rate than a traditional checking account but usually lets you write checks and make purchases regularly.

However, you might need a higher initial deposit to open a money market account, and you may need to keep a specific minimum balance to avoid a fee. You may also be limited to a certain number of withdrawals per month.

Correction: An earlier version of this article was assisted by an AI engine and it mischaracterized some aspects of savings accounts. Those points were all corrected. This version has been substantially updated by a staff writer.