Guide to High-Yield Savings Accounts

High-yield savings accounts (HYSAs) 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.

We'll go over what HYSAs 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.

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.

Is my money safe in a high-yield savings account?

Yes. Savings account funds are FDIC insured up to $250,000 per person per bank, and some banks have started offering even more coverage through partner networks, so there's no risk of losing money if your bank goes under. The risk of losing money with a savings account is pretty slim. It could be possible if you incur a lot of fees, your identity is stolen, or a hacker gains access to your bank account.

As long as you are aware of the fees your bank charges (and ways to avoid them) and you protect your personal and account information, your savings account should only make you money.

Pros and cons of high-yield savings accounts

There are both pros and cons of high-yield savings accounts. It's important to consider these factors when you're looking for the best savings account for your lifestyle.

High-yield savings account terminology

Here are a few key terms to know before you open a savings account. These are important terms for online savings accounts, traditional savings accounts, and high-yield savings accounts.

What 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.

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.

How to open a high-yield savings account

To open an HYSA, fill out an online application form or visit a branch (if your chosen bank has them). Most of our top high-yield savings accounts have strong customer service departments that can assist you with any specific questions you have.

This process should be similar whether you open a savings account online or at a brick-and-mortar bank. You will need to provide some personal information, including your address, Social Security number, and a government-issued ID.

If you are opening a joint savings account, both parties will need to provide this information.

Should you get a high-yield savings account?

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.

Alternatives to high-yield savings accounts

As you compare savings accounts, think about what you'll use the account for. Do you want to be able to withdraw your money at any time to cover unexpected expenses? Are you saving up for a major goal over several years, and could use every dollar of interest you can earn? Answering these questions will help you compare savings accounts and decide which is best for your needs.

Here's a look at the common types of savings accounts you'll run into.

Traditional savings account

Traditional savings accounts are usually easy to open and easy to access. But APYs tend to be pretty low compared with high-yield savings accounts, and most of these accounts carry maintenance fees if your balance falls below a certain amount.

Certificate of deposit (CD)

Certificates of deposit (CDs) usually offer some higher APYs than any of the high-yield savings accounts discussed above, especially with CDs offered by online banks. If you're looking for the best APY on a savings account, CDs are definitely worth considering. But you have to agree not to withdraw your funds for the full CD term (which could be months or years).

Money market account

Money market accounts offer the APYs of a savings account with the easier access of a checking account. However, these accounts usually have higher minimum balance requirements than typical high-yield savings accounts do.

Checking account

Some of our favorite online banks offer checking accounts, and many are excellent financial products. While some of the top checking accounts pay interest, you should expect a relatively low APY. Checking accounts are best suited for money that you'll need in the near future (such as for bills due soon), while high-yield savings accounts are designed for money that you might need to tap into on occasion.

Keep learning about high-yield savings accounts:

• Pros and Cons of High-Yield Savings Accounts
• Is a High-Yield Savings Account Worth It?
• Highest Savings Rates Today