When we think of saving money for either a long or short period, the first type of account that usually comes to mind is the traditional savings account. These accounts have been around for a long time, and are the standard offerings banks offer.
However, if you aim to get better and competitive interest rates on your money in savings, a high-yield savings account may be worth discovering.
In this article, we’ll look at what high-yield savings accounts are and how to get started.
How would one describe a savings account? Simply put, it is an account used to save money that a person does not intend to spend immediately. It differs from a checking account otherwise known as a transactional account which allows for everyday spending.
A major benefit of a savings account is that it helps you keep money for specific purposes which could be for an emergency fund or maybe for the downpayment of a home, and when you are ready to use the money, you can withdraw.
Types of Savings Accounts
Several kinds of savings accounts are opened based on the people’s needs such as:
Traditional or regular accounts
Are you interested in saving money for the short and long term without much concern about the interest you would get? Then this account is suitable for you.
High-yield savings accounts
Do you want to get high interest rates on savings, and maximize your money’s growth? If yes, this account may be a very good option for you.
Money market accounts
Do you want to have more access to your money and also want better interest rates on your savings? If so, the money market account is good for you.
Certificate of deposit (CD) accounts
If you want to keep your money for a fixed period only to withdraw after it matures with a good interest rate, then you may want to consider this kind of account.
Cash management accounts
This is suitable if you intend to invest in either your brokerage or retirement accounts. It is different from other kinds of savings accounts because it combines features of other types of accounts to allow save and invest from one account.
Specialty savings account
This is suitable for people with specific saving goals or for specific kinds of people. This may include kids’ savings accounts, custodial savings accounts, and student savings accounts.
High-Yield savings accounts
How high-yield savings account works
When you deposit money in a high-yield savings account, the bank pays you interest for keeping your money with them. The interest paid on your account depends on the rate given by your bank and the duration of your savings. The longer the duration and higher the rate, the higher the interest that will be paid.
Also, if there is ever a need for you to access your funds, your high-yield savings account can be linked to your checking account so that you can move money with ease and this can be done through your bank’s mobile app, online, or with the use of the ATM. There could however be a monthly withdrawal limit.
Reasons why high-yield savings account are popular
They are easy to open
Instead of going to banks and having to do lots of paperwork, queuing, and all, a high-yield savings account can be easily opened as it can be serviced by both online banks and credit unions. Some even provide debit cards to aid transactions for the account holders just like a traditional bank would. Also, you can monitor your savings performance right from your phone or tablet.
Accounts are low-risk
While the stock market may be prone to market volatility, a high-yield savings account has low risks. However, earnings may indeed drop in the future since interest rates can change.
They have high annual interest rates
They can offer a rate of up to 3.50% or more, in comparison to a regular savings account which offers a rate of about 0.40%. So if you have $7000 in your regular savings account, you would have earned $28 after twelve months.
The difference is that with a high-yield savings account, you would have earned $245 on the same amount after twelve months as well.
Benefits of a high-yield savings account
Asides the high interest rates and low-risk, other benefits include:
Compound interest: With the high-yield savings account, you do not need a large sum of money to begin. You can start small since the account allows you to make interest daily.
Easy online access: You do not need to go to any physical location to operate the account, as most if not all high-yield savings accounts are online. It also promotes mobile banking.
Easy to link with other accounts: You can link your high-yield savings account with your transactional checking account which allows you to spend money easily and from time to time, you can move your money into your checking accounts and vice versa.
Factors to consider with a high-yield savings account
The following factors should be considered before opening a high-yield savings account:
Interest rates: Are the rates currently offered by the account a standard rate or an introductory promotional rate? Is that the interest rate the account offers steadily or is it only available for a limited period?. In the case of promotional rates, what minimum or maximum balance must you have to qualify?
The minimum required balance: How much money is required of you to be kept in the account? If your balance falls below this, it can result in fees that may affect the interest rate negatively.
The initial deposit requirement: What amount of money is needed to open the account?
Fees: Does the bank or credit union charge fees? If yes, do you want to avoid those fees? You must therefore keep your balance above the minimum threshold.
Access to your money: Are there any additional options for withdrawing your money like the use of ATMs to withdraw funds?
Links to other banks: Are you allowed to link your savings account with other accounts? Are there restrictions?
Features of a good high-yield savings account
- A good high-yield savings account offers a competitive interest rate.
- A good high-yield savings account is flexible which means that your money can be cashed at any time without any penalty.
- A good high-yield savings account is not subject to constant market volatility. Also, it is FDIC insured.
- A good high-yield savings account allows you to earn interest on your money when not in use and allows you to take funds each time you need to, especially in cases of emergency.
Types of high-yield savings accounts [October 2023]
UFB high-yield savings account
- It offers up to 5.25% APY and has the following features:
- No monthly maintenance fee.
- No minimum deposit is required.
- You can access your funds 24/7 with an easy-to-use digital tool.
- FDIC insurance up to the maximum amount.
- Suitable for those who want to have high returns for their money with easy access to their cash as well.
- Free ATM cards.
The only drawback is that it does not have an option to add a checking account and though overdraft protection is given, there can still be potential overdraft fees.
SoFI high-yield savings account
- You can earn up to 4.50% APY and it also offers:
- Cash bonus up to $250 with direct deposit set up.
- No monthly fee.
- Offers checking account and ATM
- 2-day early paycheck.
- Up to $2M of additional FDIC insurance through a network of participating banks.
The drawbacks are quite much in the sense that there’s no reimbursement for out-of-network ATM fees, you don’t have a stand-alone checking account, and you have to set up direct deposit to earn high APY.
Discover high-yield savings account
- You can earn up to 4.30% APY and get:
- No minimum opening deposit
- No monthly fees.
- No overdraft fees.
- FDIC insured.
The drawback is that it offers only one type of account for savings, checking, and money market, which may be limiting for some people.
Lending club high yield-savings
- You can earn up to 4.50 APY as well as:
- No minimum balance is required.
- No monthly fees.
- Free ATM cards with fees.
- Offers a checking account.
The disadvantage of this account is that you must have an initial deposit of $100 after which there’s no minimum balance.
Varo high-yield savings account
- You can begin earning 3.00% APY and later qualify for a 5.00% APY if the requirements are met. It has the following features:
- No minimum deposit and low balance.
- No monthly fees.
- Options to add a checking account with ATM access.
- It is available to those who want to save money and find it easy to bank entirely over the phone or online.
The drawbacks, however, are that you have to meet certain requirements to earn high APY, and cash deposits are only available through third parties and as a result, may attract certain fees.
Steps in opening a high-yield savings account
- Shop for the best rate: To get the best offering, you would have to compare rates among financial institutions to find those offering higher rates on their high-yield savings account compared to others.
- Choose the financial institution that is best for you: Does your bank already offer a very competitive rate? If yes, you may want to consider opening your high-yield savings account with them. This may be beneficial as with one login, you can access both your savings and checking accounts.
- Complete the account information: As soon as you have made up your mind about which bank to use, you can start the application process, and for this, the following will be required:
- Full name
- Telephone number
- Email address
- Social security number
- A government-issued ID
If it’s a joint account, you may have to provide the same information for the other party as well. You may also be asked multiple-choice questions about your debts, and current employer just to verify the authenticity of your application. If approved, your account will be opened.
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- Fund the account: This is the next thing to do. It could be done during the application process or after. It could also be done by transferring from another bank as this is the most common way to fund the account. Some institutions may allow sending a paper check, the use of a mobile deposit of a check, or using a credit card to pay the first deposit.
Other processes include enrolling in online banking, establishing beneficiaries should something happen to you, turning on alerts and e-statements, linking any other additional transfer account, and following the rules of your accounts.
How to maximize a high-yield savings account
The following are the ways to maximize a high-yield savings account:
- First understand what a high-yield savings account is about
- Have a clear savings goal
- Automate your savings
- Create a budget
- Set up an emergency fund
- Take advantage of compound interest
- Shop around for the best rate and switch if possible since some financial institutions offer better rates than others
How to calculate the interest rates of a high-yield savings account
There are two ways through which one may encounter interest rates. Some financial institutions compound their rates annually known as APY and others do so monthly. The annual percentage yield talks about the total interest one can earn on an account per year. To calculate your monthly rates, you are to divide the APY by 12.
For example, you will get a monthly interest rate of 1% on a 12% APY ( that is 12/12). Similarly, you will get a 0.083% on a 1% APY. To calculate the monthly earned in your account after interest is paid, the formula below is used:
A = P × R × T
A = P(1+R/N)N/T
A: The amount of money you’ll have in your bank account after interest is paid.
P: The principal deposit or the original amount in your account.
R: The yearly interest rate of your account in a decimal format known as APY.
N: The number of times your bank compound interest in a year.
T: Time in years.
The amount earned on an account of $1000 with a monthly compound interest of 1% APY will be calculated thus:
P: $1000, R: 1% (0.01), T: 1 year, N: 12 ( since the bank compounds monthly, it will compound 12 times a year), T: 1, A:?
A= 1000 ( 1+0.01/12)12×1
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Downsides of high-yield savings account
- Interest rates are variable and can fluctuate at any time.
- It is a risky way to grow wealth as the rate of inflation over time can increase.
- Savings are accessible but with limited withdrawals. Any attempt to withdraw more than the limit would incur fees.
- A physical bank location is absent.
- Not all online banks offer ATMs for easy withdrawal.
- Transfers from one bank to the other takes a lot of time, sometimes, 24 hours.
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There are several alternatives to a high-yield savings account depending on the purpose. A high-yield savings account is good if one is interested in getting a competitive interest rate on funds but there could be other limitations such as fees charged for going beyond the withdrawal limit, minimum initial deposits, and fluctuating rate.
The certificate of deposit (CD) account is one such alternative. In this account, rates do not fluctuate as in a high-yield savings account. This solves the problem of the fluctuations of rates in a high-yield savings account. Secondly, it offers more competitive rates than a high-yield savings account.
A high-yield savings account is one way to earn very good interest on your money. If what you desire is to put some money aside for either a long or short term to invest, purchase, or do any other thing, with very competitive interest rates, you can consider this kind of savings account.
That way, your money does not just stay with you without any interest nor do you have to put it in a traditional account with a very low rate. However, compare the upsides and downsides of each kind of high-yield savings account to maximize your money.