What Is a High-Yield Savings Account?

High-yield savings accounts have become one of the most popular places to store extra cash -- and there's a good reason for that. They give you an opportunity to earn a high interest rate on your money while keeping it safe and easily accessible.

You may want to open a high-yield savings account to earn interest on money you plan to need within the next one to five years. Consider opening an account to safely build an emergency fund that slowly earns you passive income.

Still thinking about it? Read on. We'll go over what these account types can offer you and how they stack up to regular savings accounts.

What is a high-yield savings account?

A high-yield savings account is a deposit account that offers a higher annual percentage yield (APY) than what traditional savings accounts offer. This earns more money faster on deposits.

Most high-yield savings accounts are offered by online banks because their operating costs are lower. Without a branch network to maintain, they can charge fewer fees and offer better interest rates than brick-and-mortar banks can.

Here's a closer look at how high-yield savings account rates stack up to traditional savings account rates.

How do high-yield savings accounts work?

A high-yield savings account works the same way as a traditional savings account: You deposit money into the account, and the bank uses that money to fund loans for its other customers. Banks earn interest on loans, and you receive a piece of this interest.

How much you get depends on your APY and your balance. Most high-yield savings accounts are compounded daily, which means you earn interest on your money every day. However, most banks only deposit the interest into your account once per month.

Once that interest is in your account, you begin earning interest on it, too. This is known as compound interest. For example, if you deposit $10,000 into a high-yield savings account that earns a 0.60% APY, you'll earn $60 after one year. The next year, you'll earn a 0.60% APY on both your initial $10,000 and the $60 you've already earned.

LEARN MORE: A Beginner's Guide to Banking

Factors to consider when choosing a high-yield savings account

Here are some of the key factors to bear in mind when choosing a high-yield savings account.

APY

High-yield savings account rates fluctuate all the time, and so does the definition of a competitive rate. Before the COVID-19 pandemic, most savings accounts had rates close to 2% APY. When the lockdowns began, those rates plummeted to around 0.30% APY.

The Federal Reserve has raised interest rates this year in an attempt to slow inflation, and APYs have shot up to more than double pre-pandemic levels. This just goes to show that these rates can change frequently. Your rate may change anytime.

That's why it doesn't make sense to choose a high-yield savings account based on APY alone. What's the best rate today may not be the best rate tomorrow, so consider other factors like balance requirements and withdrawal options. You also shouldn't nitpick small differences in APY. All you really need is a rate that's competitive with the rates of other top online banks.

Balance requirements

Many high-yield savings accounts don't have balance requirements, though there are a few that do. Make sure you feel comfortable meeting this requirement before you open your account. Otherwise, you could lose money to fees.

Some banks use a tiered APY system. This means the rate you earn is tied to how much money you keep in your account. Familiarize yourself with all of these rules before opening an account.

Withdrawal options

High-yield savings accounts almost never include check-writing capabilities, and very few come with ATM cards. Often, the only way you can withdraw cash is to use automatic bill pay or transfer funds to a checking account. This can take up to a few days if the checking account is at another bank.

That may not be an issue if you withdraw savings sparingly. But if you plan to make a lot of withdrawals, you should look for an account with an ATM card or consider opening a checking account at the same bank as your high-yield savings account. That way, you can transfer money between accounts quickly.

Fees

High-yield savings accounts generally have few fees, but it's a good idea to look over the fee schedule anyway so you know what the bank charges you for. Monthly maintenance fees are pretty uncommon, but you could face problems if you make a lot of monthly withdrawals.

Are withdrawal fees still a thing?

For many years, a federal law known as Regulation D meant that every bank charged customers for making more than six monthly withdrawals from their savings account. Though the government waived this law at the start of the COVID-19 pandemic and hasn't reinstated it, some banks still hold onto the old ways. To check, contact your bank.

FDIC insurance

The best high-yield savings accounts all have FDIC insurance. This protects your money up to $250,000 per depositor per bank against bank failure. So you don't have to worry about losing your savings if the bank goes out of business.

It's always a good idea to verify that a bank is FDIC insured before you open an account with it. Often, you'll find a notice that says "Member FDIC" in the footer on the bank's website. And you can double check this by looking the bank up using the FDIC's BankFind tool.

Is a high-yield savings account right for you?

A high-yield savings account could be a great choice for you if you're looking for a place to house your emergency fund, as well as other money you plan to spend within the next five years or so. But these accounts aren't right for everyone.

Checking accounts are the better choice for everyday spending because they offer more withdrawal options and no limits on monthly withdrawals. Brokerage accounts are better for long-term savings because investments earn a lot more over the long term.

Ready to open an account? Start by checking out our list of the best high yield savings accounts (they offer the lowest fees and the highest rates of return). Then open an account online.

Still have questions?

Here are some other questions we've answered:

• What is a checking account?
• What is a certificate of deposit (CD)?
• What is a money market account?