High-yield savings accounts are worth getting to know. “High interest” or "high yield savings accounts" are basically savings accounts that pay better-than-average interest rates. They’re a type of account that may be federally insured and may earn more than the national average Annual Percentage Yield (APY) of a standard savings account. These higher rates may come with conditions like minimum balance requirements or maintenance fees — but not always. (That’s why it pays to shop around.)
The reason to consider them: Compared to a regular savings account, the national average APY is just 0.35% as of February 2023, according to the Federal Deposit Insurance Corporation (FDIC).
Some accounts offer high initial rates that drop to lower-than-average after a certain time period. You may even find that the savings accounts offering the most competitive rates aren’t specifically termed “high yield” or “high interest” at all.
How do high-yield savings accounts work?
A high-interest savings account works similarly to a regular savings account but earns interest at a much higher rate. You earn interest on the money that you have sitting in the bank’s savings account. The rate of return is measured in APY, which reflects the amount you earn in interest in your bank account over a year.
After you comparison shop for the best rates on an account (and take a look at fees and account requirements), you'll complete your bank's application to get your account.
Once you obtain your account, you can use your high-yield account just like a regular savings account. When you set aside money, your deposits earn interest according to the account terms.
As you save money for a specific short- or long-term savings goal, interest you earn in a savings account may be reported as taxable income.
What are high-yield savings accounts good for?
High-yield savings accounts can allow you to save for a number of goals.
Emergency fund: Experts recommend stashing away three to six months' worth of expenses in an emergency fund. You want to save your money in liquid assets, and a high-yield savings account can provide that liquidity you want.
Short-term savings: If you have a short-term savings goal, such as saving for an upcoming vacation, a high-yield savings account might be a great place to save your money.
Large expenses: If you need one central place to keep your money for a large expense, such as a down payment for a house or new car, you may want to consider a high-yield savings account so you maximize your savings, and at the same time, keep your initial principal safe.
Benefits of high-yield savings accounts
One of the biggest benefits of high-yield savings accounts is that they offer higher yield than regular savings accounts. Take a look at some other benefits:
Accessibility: With a high-yield savings account, you can take your money out whenever you want without penalty. This is different from a certificate of deposit (CD), which guarantees a certain rate for a fixed period of time but may charge a penalty if you withdraw your money early.
Safety: As an Ally Bank customer, your Ally Bank deposits are insured by the FDIC up to $250,000 per depositor for each qualifying account ownership category.
Disadvantages of high-yield savings accounts
High-yield savings accounts allow you to stash cash, but they still have some potential downsides, including:
Stricter requirements: Since high-yield savings accounts typically offer better interest rates, they may have more robust requirements, such as a higher initial deposit amount or withdrawal limits.
Keeping up with inflation: High-yield savings accounts likely will not offer high enough returns to beat inflation and aren’t generally considered efficient tools for long-term goals, like retirement. Other investment vehicles, like stocks, have the potential to offer greater returns.
Interest rates can change: Interest rates may go up or down. Changes can occur at any time. (Unlike CDs, which have set rates for specific amounts of time.)
Charges on withdrawals: Before the COVID-19 pandemic, a federal law known as Regulation D would kick in. This means that customers who made more than six monthly withdrawals would have to pay fees. If you take more than six withdrawals, your bank may charge you a fee for withdrawals. In fact, your bank may close your account or convert it to a checking account. Ally Bank is temporarily refunding this $10 excessive transaction fee that exceeds the six withdrawal and transfer fee limit.
How to open a high-yield savings account
Have you opened a savings account before? Opening a high-yield savings account is pretty similar. Here's how to get one:
First, gather your personal information, which includes identification (like a driver's license) and be ready to provide your date of birth, address, phone number and email address.
Fill out the application (which shouldn't take more than 10 minutes) and fund your account. Fill out a direct deposit form or link a checking account to fund your new savings account. You may also choose to mail a check, deposit a check through a mobile app or make a bank wire transfer. You may have to meet a minimum balance requirement to avoid monthly fees.
Finally, set up online banking for a user-friendly way to manage your money.
What to look for in a high-yield savings account
What might you look for in a high-yield savings account? Getting the highest rate shouldn’t be your only consideration. You want to make sure the other features and terms of the account work for you, too. Compare things like minimum balance requirements and fees, along with customer service reviews, website usability and more, just like you might do when you compare checking vs. savings accounts.
Interest rates on savings accounts can vary widely, which suggests that it's a good idea to shop around to the best rate available.
Required initial deposit
You can open high-yield savings accounts with as little as $0 (typically through online banks). Some banks may require you to start with $100 or more.
Minimum balance required
You may have to meet higher balance requirements for a high-yield savings account. If you don't keep up with the requirement, you may have to pay a nominal monthly service fee. Higher-yield accounts average about $16 per month for these fees, which can eat into your returns.
Check for account fees, though online banks typically don't charge monthly maintenance fees due to their lower overhead costs compared to traditional banks. Look for little to no maintenance fees, minimum balance fees, withdrawal fees and wire transfer fees. Getting a high yield plus little to no fees can offer you a real win-win.
Accessing your money
Your bank can link your savings and checking account, so you can easily transfer funds. If you want to access your money, you can transfer the money to your linked checking account or take it out through an ATM, though the process may be different, depending on the bank.
Compound interest adds accumulated interest to your principal (the amount in your account) which also earns interest as well. Interest may compound daily, monthly, quarterly or annually on a high-yield savings account. Prior to choosing a bank and account, find out how often it compounds to learn how fast your balance will grow.
Take into consideration any features the savings account includes. Many digital-first banks offer budgeting and goal-setting tools that can help you simplify and organize your savings — don’t underestimate the power of savings tools as you shop around for the right savings account.