What Is a High-Yield Savings Account?

Chris Rykwalder is a senior investment consultant at Northwestern Mutual.

Let’s say you finally set up a savings account for that kitchen renovation you’re planning to start next year. And though you’ve been diligently stashing money away, you’d love to give your cash a boost to help fund that splurge-worthy backsplash you’ve been eyeing.

That’s where a high-yield savings account can come in handy. These accounts offer a higher interest rate, or annual percentage yield (APY), than traditional savings accounts. The higher the interest rate on your account, the more opportunity your money has to grow, thanks to compound interest.

If you’re looking for a place to park your cash until you’re ready to decide on that kitchen tile, you might consider placing it in a high-yield savings account.

Benefits of high-yield savings accounts

Keeping your money in a high-yield savings account has its perks. Here are the top advantages to consider.

1. They offer higher interest rates

There’s no official threshold that pushes a savings account’s APY into high-yield territory; it’s more that the rates are higher when compared to the rates typically offered by banks. (This is why high-yield savings accounts are also called high-interest savings accounts.)

As of June 2024, the average interest rate on a traditional savings account is just 0.45 percent, according to the Federal Deposit Insurance Corporation (FDIC). But if you’re shopping around, you’ll notice that rates can be as low as 0.01 percent. High-yield savings account rates are another story. Over the past year, some APYs are as high as 5.55 percent. Let’s pretend you put $10,000 into a high-yield savings account with a 5 percent APY. After a year, your balance will grow by more than $500, assuming interest is compounded daily.

How can banks offer savings accounts with such high interest rates? APYs on savings accounts are loosely tied to the federal funds rate, which is a benchmark rate set by the Federal Reserve. This rate directly affects how much it costs commercial banks to lend and borrow money between each other. These changes often trickle down to people with high-yield savings accounts. When the federal funds rate goes up or down, APYs usually do too.

2. They’re low-risk investments

Have a financial goal you’re trying to reach within the next few years? Whether you’re funding a dream vacation next year or setting money aside for a new car in three years, a high-yield savings account is a good place to consider putting your savings.

One reason you might opt for that over an investment account is the risk of losing money if the markets get volatile—and the shorter your time frame, the higher that risk could be. Another upside of having a high-yield savings account at a bank is that your money is FDIC-insured for up to $250,000. Similar protection is available from the National Credit Union Administration (NCUA). And if interest rates go up, your APY might get even higher.

A high-yield savings account can be a good place to put your emergency fund—and your earnings could also be a nice source of passive income. What’s more, your money has the chance to grow while being 100 percent liquid. That means it’s always accessible to you in a pinch. Pulling money out of an investment account, on the other hand, could result in early withdrawal penalties and tax repercussions.

Note that money market accounts are often considered interchangeable with high-yield savings accounts, but they are different. A high-yield savings account can be more easily accessible (liquid) than a money market account. And a high-yield savings account is FDIC insured.

3. They’re easy to open

You may find that a lot of online banks advertise high-yield savings accounts because they don’t have the same overhead costs as their brick-and-mortar counterparts. That allows them to pass those cost savings on to consumers in the form of higher interest rates.

The truth is that traditional and online banks both offer these types of savings accounts, so it’s important to shop around for the best APY. You should also read the fine print on those high-interest offers because you might have to meet certain terms and conditions to qualify.

What is the downside of a high-yield savings account?

Like any other financial product, high-yield savings accounts have some potential downsides. Below are a few important things to keep in mind.

Returns lag behind other investments

If you’re trying to supercharge your long-term savings, a high-yield savings account might not be your best option. Investment accounts, which involve more risk, can potentially lead to better returns in the long run.

You may have limited access to funds

A big selling point of high-yield savings accounts is their liquidity, but there may be stipulations here. Up until 2020, the Federal Reserve limited consumers to six savings account withdrawals per month. That official rule is no longer in effect, but banks differ. For example, you may be limited to six electronic transfers and withdrawals per month. After that, you might encounter a fee if you go online to transfer funds out of your savings account.

There may be fees and other requirements

There are plenty of high-yield savings accounts out there that don’t charge fees, but that isn’t always the case. You might run into maintenance fees, overdraft charges, inactivity fees and more. Also be on the lookout for minimum opening deposit requirements. Similarly, some banks may reserve their highest APYs for account holders who maintain a certain balance. Again, high-yield savings accounts are a great option to get some growth from your savings, but it’s possible to lose money in the form of fees. Translation: Get clear on the bank’s policies before opening an account.

What to consider before opening a high-yield savings account

Speaking of fine print, here are a few things to check for when comparison shopping:

• Whether the advertised APY is permanent or just an introductory offer
• How often the interest is compounded, and how often they credit your account with that interest (the more frequent, the better)
• How much money you need to deposit to open the account
• Whether you’ll be charged a fee if your balance falls below a certain amount
• Whether the bank requires you to open other accounts (like a checking account) to get the advertised APY

If you choose to go with an online bank, read their reviews and make sure you’re comfortable with their app. Also ask about their ATM network in case you need actual cash.

Here’s one more pro tip: Consider keeping your savings account at a different bank from where you keep your checking. If they’re both with the same bank, it can be dangerously easy to dip into your savings when temptation strikes. Keeping things separate could help you reach your savings goals faster.