What Is A High-Yield Savings Account? The Complete Guide You Need to Know

3 mn read

If you are looking to keep the money for the short or long term, a high-yield savings account can be a good option. The interest rates on high-yield savings accounts are also higher than those on traditional savings accounts.

Your goal may be to maximize the growth of your money, so you may want to find the best savings rate. Your savings balance will grow faster and generate a higher yield as you accumulate more savings, especially if interest rates on traditional savings accounts are falling.

You may be wondering how higher interest savings account works and where to open one if you’ve never had one previously. It is important to understand the basics of high-yield savings accounts before deciding whether or not to open one.

What Is a High-Yield Savings Account?

Traditional banks, online banks, and credit unions offer savings accounts as a type of deposit account. The bank gives interest on your savings account balance when you deposit money into it. If you earn $10 or more in interest, you will have to report it on your taxes at the end of the year.

One major difference between a high-yield savings account and a regular account is the interest rate. You might earn a rate of interest and accompanying annual percentage yield (APY) that is 10 to 25 times higher.

A savings account that pays a high rate of interest is called a high-yield account. This is an example of what a high-interest savings account can offer compared to a regular savings account.

For example, you want to open a savings account with $1,000 and save $100 a month. There is a 0.05% savings account at bank A. 0.50% interest is paid by Bank B on its high-yield savings accounts.

The interest you would earn from your initial deposit and monthly contributions would total $0.77 for a year. The interest you would receive from Bank B would be $7.75, or about ten times the amount.

They illustrate what a great deal of difference can exist between traditional and high-interest savings accounts, despite their relatively small numbers. You can earn more interest with a high-yield savings account when you deposit more and earn a higher annual percentage yield.

How Do High-Yield Savings Accounts Work?

A high-yield savings account is one of the types of savings accounts, but they have some shared features

Savings accounts that offer high-interest rates include:

  • Bank and credit union accounts can be opened
  • That allows you to make deposits and withdrawals regularly
  • And can be withdrawn or transferred to linked bank accounts

When held at an FDIC-insured bank, high-yield accounts are protected from the FDIC. Each account ownership category receives the same protection limits, just like other types of savings accounts. This means that even if the bank fails, your savings are protected up to the applicable limits if you have a high-interest savings account.

In addition to their interest rate and APY, high-yield savings accounts are also characterized by the following:

  • Where you can open them
  • Minimum deposit requirements
  • Monthly fees

A traditional bank or credit union is usually able to offer a high-yield savings account. The majority of them are likely to be found at online banks and neo-banks (fintech that offers online financial services).

The withdrawal limit on a high-yield savings account will also be the same as that on a traditional savings account. Banks and credit unions can still limit how many withdrawals you can make, despite the suspension of federal rules restricting savings account owners to six withdrawals per month. Excess withdrawal fees may also apply.

Compared to brick-and-mortar banks, online banks usually have lower operating costs. Because of this, they can offer savers higher interest rates. The banks are also likely to charge fewer fees for high-yield savings.

You might not have to pay minimum balance fees or monthly maintenance fees. Overdraft fees and wire transfer fees might not apply, either. In addition to the higher interest rate, you save on fees with high yield savings accounts.

Banks may have different minimum deposit requirements. At certain online banks, you can open high-yield savings account with as little as $0, though some may require that you have at least $100 to get started.

Benefits of High-Yield Savings Accounts

The benefits of opening a high-yield savings account can help you decide whether it’s worth it.

You can keep your savings in a high-yield account until you plan on spending them. Among the things that you can save for using a high-yield savings account are:

  • Emergency savings
  • Vacation funds
  • Planning a wedding
  • Paying for medical expenses
  • Buying a car
  • Starting a business
  • Buying a home
  • College planning

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