What you need to know before choosing a high yield savings account

What is a high yield savings account (HYSA) and is it a good idea?

A high-yield savings account (also sometimes called a high interest savings account) is an account usually offered by an online bank that provides an unusually high interest rate. That savings rate is calculated as an APY (annual percentage yield), but can often be calculated on a daily basis. The savings rate on these high interest savings accounts can sometimes be 20 times the rate of a traditional savings account. These accounts often have a minimal amount of restrictions and provide ready access to the money.

Pros of a high yield savings account:

• Interest rate: You receive a much better interest rate than traditional savings accounts. In some cases, a high yield savings account can provide a rate that is twenty times as high as a traditional savings account. 
• Interest compounds daily: Interest in high yield savings accounts usually compound daily which means that money is growing whenever you have money in the account. 
• Savings are insured: High yield savings accounts in FDIC insured banks are guaranteed up to $250,000 in the event that the bank becomes insolvent and fails. 
• Funds are liquid: Your funds are always liquid, meaning you always have access to them.
• Fees are avoidable: You can easily find high yield savings accounts with minimal fees.
• Money is accessible: Money in high-yield savings accounts are never locked away. You can access them and move them whenever you need the funds. 
• Low minimums: More and more high-yield savings accounts offer the ability to get started with very low minimums. In some cases, you can open an account with as little as $50 or $100. 
• Online access: Most high yield savings accounts are offered by online banks, which means managing the funds can be as easy as pulling out your phone. 

Cons of a high yield savings account:

• Variable interest rate: The interest rate in high-yield savings accounts fluctuates with the federal funds rate. The advertised interest rate isn’t guaranteed. 
• Still doesn’t keep up with inflation: High yield savings accounts offer significantly better interest rates than traditional savings accounts, but even at their best, they aren’t keeping up with inflation. 
• Withdrawal frequency limits: High-yield savings accounts often put restrictions to the number of times you can withdraw money in a calendar month. The limit might not be a problem for you, high yield savings accounts are not meant to be a place to manage your daily finances. 
• Bank offers limited services: If you bank with a traditional bank, you are unlikely to be able to get a high yield savings account with them. Most high yield savings accounts are offered by online-only banks that can offer better interest rates because they don’t offer a lot of other services or features.
• ATM access not guaranteed: Some high yield savings account providers offer access to an ATM network, but not all of them do. 
• Moving money may take time: If you do most of your banking with a traditional bank and only keep some funds in a high yield savings account with a different bank, you might find it could take up to 48 hours to move funds back and forth. 
• Not a good long-term strategy for money: High yield savings accounts can certainly provide better interest rates than putting the money in a traditional savings account, but it still does not provide good long-term returns on the money. Using high yield savings accounts is not an investment strategy.
• Minimum deposits: Some high yield savings accounts require minimum deposits or minimum balances.
• Could be more bother than it’s worth If you have only a small amount of money in a high yield savings account, you may find that some of the restrictions to be more bother than they are worth.

Before you settle on a high yield savings account, you should check these four things

1. Can you find a better yield with an online bank? Shop around. You may be able to find a better rate with a smaller bank. 
2. Are there any fees that would bite into the interest you earn? Even though your interest rate could be as high as 20 times that of a traditional savings account, if you have few funds in the account, fees could eat up any increase you could expect. Keep an eye on the possible fees associated with an account before you sign up.
3. How easy is it to be able to access the money in the account when you need it? If you find that immediate access to the money is important, make sure you understand how long it takes to transfer the money to an account where you can do something with it. You might also consider whether the bank has a reliable app to make managing the account easier for you. 
4. How long do you expect the money to stay in the account? A high yield savings account can be a great way to responsibly manage your money, but it could also be a trap. If you have a sizable amount of money that you don’t think you will need in an emergency, you might need to think of a better long-term investment strategy for the money. Even if it is “high yield,” a savings account is no place for money that could be generating a better long-term return. 

The answer to those four questions can ultimately help you determine whether a high yield savings account will be worth the effort. It can also help you determine which bank is the best one for your situation. 

How to use a high-yield savings account

The following are key principles for using high-yield savings accounts effectively.

Parked money that needs to stay liquid

High yield savings accounts are a great place to put money that you don’t need on a day-to-day, or even month-to-month, basis, but that you need to be able to access in short notice. If you need to keep a pile of money for easy access, a high-yield savings account is a great place to put it. 

Don’t use it for money that constantly moves in and out of your monthly budget

High yield savings accounts may actually be more trouble than they are worth if you need to move money back and forth from your high yield savings account and your checking account. This is especially true if the bank calculates your interest on a monthly basis, instead of a daily basis. 

If the bank calculates the interest daily, you could absolutely generate good interest earnings by regularly moving that balance up, even for only a week or so. 

Great for emergency funds that you want to keep separate

Putting your emergency fund in a high yield savings account can be a great way to keep it just far enough out of reach that you aren’t tempted to dip into it for that weekend getaway. And if you can avoid emergencies, you might find that the fund grows on its own through the power of daily-accrued interest. 

Great when you are saving up for a major purchase

As you save for a major purchase (a purchase that might take months or even years to save up for), if you put those funds in a high-yield savings account, you might find that when you are ready to buy, the interest you’ve earned could pay the sales tax.

A good way station between your short-term money and your long-term investments

As you move money from your monthly finances into longer-term investments, high yield savings accounts may be a great place to park the money until you have a chance to move them into the right investment. If the funds are going to sit around a while, you might as well be earning a little extra interest.

Other things to consider when looking for a high-yield savings account

There are almost as many flavors of high-yield savings accounts as there are ice cream. Some of them provide extra benefits, while others keep it simple and maximize the APY (annual percentage yield). Looking across the range of all the providers, there are a lot of different things to consider. The following is a list of some of the things you might consider before you settle on the bank you will get your high-yield account with.

Bonus when you sign up for direct deposit

Some banks will give you a bonus for signing up to direct deposit your paycheck. If this doesn’t upend autopay bills and management of your monthly budget, it might be worth the money. 

Bonus when you transfer a certain amount

Some banks will offer a bonus when you transfer a minimum amount. If you were planning to move that amount of money anyway, a bonus could offset a slightly lower APY.

Minimum balance fee 

If you don’t think you will have a consistent amount of money in the high yield savings account, make sure you don’t sign up for an account that charges a fee when you dip below a minimum balance. You might lose a significant portion of the interest you would otherwise of earned. (For example, one company charges $4.50 a month if you don’t maintain at least $500 in the account.)

Minimum to open

Some banks require a certain minimum deposit to open the account.

Other features (budgeting or savings goals tools)

Some high yield savings account providers offer budgeting tools and other features that can support you in your savings goals.

Rewards 

Banks are starting to attach more than just a high interest rate to a high yield savings account. For instance, one offers to give you sky miles instead of cash. 

ATM access 

Don’t underestimate the value of accessing the funds in the high yield savings account. Not all providers have a nationwide network of ATM machines which means you might not have access at all, or you might need to pay an access fee every time you need to use an ATM. There are some smaller providers who have a policy to reimburse you a limited amount of out-of-network ATM fees every month. If ATM access is important to you, look into which banks provide what you need. 

Withdrawal limits 

It’s not uncommon for banks to set withdrawal limits to their high yield savings accounts. If you think you will need to dip into those funds more than 5 times a month then you will need to find a provider that offers that option. Otherwise you will need to use the account differently. If you exceed the withdrawal limits, you are likely to get hit with a per-transaction fee. 

Balance tiers

Some providers encourage high balances by providing a tiered APY schedule based on the account balances. Be careful that you aren’t signing up for an account based on an interest rate that you are unlikely to qualify for because you won’t have enough money in the account. You might find that you try to manage the account to keep above certain thresholds. This could either be annoying or a great incentive to keep the savings intact. 

Applying 

Applying for a high yield savings account is not difficult (it’s not like applying for a loan!), but you will need to provide government-issued identification and your social security number. This is, of course, no different than any other savings account.

Maximums 

High yield savings accounts don’t usually have a maximum amount that you can put in them. But there is a natural maximum limit based on the fact that FDIC insurance will not insure bank account balances over $250,000.

Mobile app

Some smaller banks still don’t have great user experience on their mobile apps. If being able to manage your high yield savings account on the go is important to you, do a little research on the app store of your preference to ensure that the bank has an app that won’t drive you crazy. 

What kinds of fees might I get from a high yield savings account?

High yield savings accounts don’t have as many fees as a checking account might, but that is mainly because the product is pretty simple. Put money in and let it grow through the magic of accruing interest. A high yield savings account might have the following fees:

Minimum balance fees

Some banks charge a fee if your balance drops below a certain threshold (for example, $500). If you think this could be a problem, you might lose a chunk of the interest you earn.

Overdraft fee

Some high yield savings accounts offer an ATM card that will allow you to access your funds. In some cases, they will simply deny transactions that put the account below zero. But, some accounts offer a limited overdraft service. But, of course, triggering an overdraft will mean being dinged by a fee.

Out of network ATM usage fee

Keep an eye on which ATMs you are allowed to use without incurring an out-of-network ATM fee. You could quickly lose whatever interest you earn on ATM fees before you realize what is happening. 

Excessive withdrawal fee

Most high yield savings accounts have a maximum number of withdrawals you can make in a calendar month. When you exceed that amount, they will still allow you to make the withdrawal, but they will impose a fee. For this reason, a high yield savings account isn’t traditionally a good account from which to manage most of your regular finances.

What is the difference between a high-yield savings account and a certificate of deposit?

A high-yield savings account offers a higher interest rate (or APY) than a standard savings account but the rate is usually slightly lower than you get with a CD. The rate also floats withthe federal funds rate and can go up or down at any time. The value of a high-yield savings account is it provides more flexibility in accessing your money over time. A certificate of deposit (CD) is a savings product that offers a significantly higher, fixed interest rate compared to a traditional savings account and slightly higher than a high-yield savings account, but penalizes you if you remove the funds before the CD matures. 

What is the difference between a money market account and a high-yield savings account?

On the surface, there often doesn’t appear to be a significant difference between a high-yield savings account and a money market account. They both boast much higher interest pay out than a traditional savings account and they both have some restrictions on the number of transactions you can execute in a month. 

Is a high yield savings account the best way to build a savings?

A high yield savings account can be a great way to build a savings. Not only will your savings earn a better APY (annual percentage yield) than it would in a traditional savings account, it gives you the option to pull the money out whenever you need it like a money market account, but unlike a certificate of deposit which requires you to not touch the money. If your high yield savings account is with another bank, it can also help to prevent you from using the money frivolously since it will take an extra step in moving it to where you can use it. You can learn more about the best strategies for saving money here.