If you’ve ever dealt with a bank, and I find it hard to believe you haven’t, you’ve probably considered opening a savings account to earn passive income over time.
This is a typical practice as many people want to see their assets grow over time through the accumulation of interest. However not all accounts and banks offer the same incentive rates, so it’s important to compare prices to find out which is best.
Now comes the role of high-yield savings accounts. Although the average yield on a standard savings account is only 0.33%, a high-yield savings account can offer you much more. In 2023, for example, the average interest rate on these bank accounts will exceed 4%.
Investing money in a high-yield savings account can help you reach your goals faster; whether short-term, like a trip, or long-term, like a down payment on a house.
Next, we are going to talk about the profitability of high-yield savings accounts, highlighting several examples offered by different financial institutions.
- High-yield savings accounts typically offer a higher interest rate than traditional savings accounts.
- The annual percentage yield (APY) is the effective rate of return on the investment when compound interest is considered.
- Different banks and credit unions have different rates, minimum balance requirements, monthly maintenance fees, ATM fees, etc., so you should do your research before depositing money.
- The FDIC or Federal Deposit Insurance Corp, insures savings account deposits of US citizens up to $250,000.
- The APYs and requirements listed in this article are accurate as of the date of publication but are subject to change.
What is a high-yield savings account?
As its number suggests, a high-yield savings account, or high-interest savings account, generally offers higher interest rates, allowing your funds to grow more quickly as they are deposited into the account.
The rate offered on these accounts is expressed as an annual percentage yield (APY). With a higher APY, your funds will grow faster.
However, the APY that savings accounts offer at the time of enrollment is often subject to change. These rates are not fixed and often rise or fall in response to movements in the federal funds rate set by the Federal Reserve.
The current economic situation has caused savings rates to decline, although the best accounts still offer returns of more than 12 times those of standard savings accounts.
In particular, annual percentage yields (APYs) on high-interest savings accounts tend to rise along with new rate hikes from the Federal Reserve.
Plus, in most cases, your money not only receives a higher interest rate with a high-yield savings account, but you also have the same access to your funds as with a standard savings account.
What is APY and how is it calculated?
The APY is the effective rate of return on the investment when compound interest is taken into account. Unlike simple interest, compound interest is calculated periodically and added immediately to your balance.
Since interest is based on the ending account balance, this amount will increase with each passing period.
The APY normalizes the rate of return on investment. To do this, calculate the predicted real annual growth rate from compound interest, assuming the funds are deposited. The annual percentage return is calculated as follows:
- R = period rate
- N = number of compounding periods
The rate of return is the fundamental criterion by which every investment is evaluated, whether it is a CD, a stock, or a government bond. The rate of return is the increase in the value of an investment expressed as a percentage over a given period, usually a year.
However, comparing asset returns over various compounding periods can be challenging. Both daily and quarterly/biannual capitalization is possible.
By ignoring the impacts of compound interest, comparing rates of return by expressing the percentage value over a year gives an inaccurate result.
Therefore, knowing the frequency of compounding is critical because the faster an investment grows, the more often compounding must occur. This is because each time it is capitalized, the interest received during that period is added to the original balance. Future interest payments are calculated based on the larger principal amount.
In particular, annual percentage yield (APY) rates change frequently, and what was once a competitive rate may no longer be competitive due to changes in the overall economy.
As the Federal Reserve raises interest rates, annual percentage yields (APY) on savings accounts also typically increase. Thus, when monetary policy is restrictive or strict, APY rates on savings accounts tend to be higher.
Best High Yield Savings Account Rates
Here is the list of the 15 best high-yield savings accounts ranked by APY. However, please note that the APYs and requirements listed below are current as of the publication of this article and may change over time.
How to open a high-yield savings account
Although opening a high-yield savings account is quite simple and trivial, there are some mandatory things you should consider before committing to it. Below you can see a list of several required steps before opening an account.
1. Look for the best rates
The savings account rate at a traditional bank probably isn’t very attractive if you keep your checking account there. But hundreds of different banks and credit unions are now accessible across the country, and you’ll need to do your research to find the best savings rates.
2. Submit the request
After choosing a financial institution to open your new high-yield savings account, you must complete the necessary paperwork. The process can take from a few minutes to several days, depending on the bureaucracy and requirements of the financial institution.
The interest you earn is considered taxable income, so you must provide the bank with your full name, address, phone number, email address, and social security number (SSN). You will also be asked to provide your driver’s license or identification information and/or a photo of the document.
3. Fund the account
Some institutions require that you initiate an electronic funds transfer from an external account to your new account as soon as possible during the application process to fund the minimum initial deposit.
Some banks do not require a minimum initial deposit, while others allow you to open an account without funds.
The most common method to fund a new savings account is to make a direct deposit from another bank; However, some financial institutions also accept paper checks, mobile check deposits, and credit card payments.
4. Download the online banking app
After opening a new bank account, the next step is to register for online banking. In some cases, you can do this immediately after submitting your online application.
5. Follow your account rules
Last, but not least, make sure you thoroughly understand the terms and conditions of your account so you can get the most out of it with minimal or no expenses.
Keep track of ongoing minimum balance requirements, as well as the federal mandate that limits withdrawals to no more than six per statement cycle. If so, make sure your account balance never falls below the required amount.
Are your savings safe in the bank?
Investment security is always a top priority for anyone holding onto their hard-earned money. So, are your bank accounts safe?
They are relatively safe. Deposits in the United States and many other countries are guaranteed by the government up to a specific amount in the event of bank failure, protecting both individual depositors and the financial system as a whole.
In the United States, deposits are now insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).
This suggests that a married couple can feel safe depositing up to $500,000 into a joint savings account. It also suggests that a million dollars spread across four accounts at different financial institutions is safe from theft. Traditional savings accounts, money market accounts, and certificates of deposit are all eligible for FDIC insurance.
But what happens if you already have more than $250,000 saved? In this case, you should talk to your bank about the level of protection for your deposits and your options for protecting your entire savings balance.
You may have to split your money into several accounts at different FDIC-insured banks, each with a different owner or beneficiary.
Conclusion
A high-yield savings account is a great option if you want to save money for something you’ll need or want shortly, but not immediately.
It’s not as good as a tax-free retirement or investment account, but it can be a great substitute for some savings goals.
A high-interest savings account is a good option for an emergency fund because you can access the money whenever you need it.
However, keeping your child’s college earnings in a high-yield savings account isn’t a good idea if you have a decade or more to invest. Your return may be lower than the inflation rate over the long term, and APY rates tend to fluctuate. Therefore, it is not a good idea to put your money in a savings account for years, instead of investing it.
Frequent questions
Should I put my money in a high-yield savings account or invest?
Experts often recommend building up short-term savings and then investing excess funds. For this reason, risk-free high-yield savings accounts are a great option because they ensure you never lose access to your money.
Is a high-yield savings account better than a regular savings account?
The main distinction is the higher yield available through high-yield savings accounts. Currently, average interest rates on a regular savings account hover around 0.33%, while the average rate on a high-yield savings account is 3.54% or higher.
Is my money safe in an online savings account?
The Federal Deposit Insurance Corporation, or FDIC, insures deposits of up to $250,000 per customer at each insured bank. Most traditional banks have this insurance that also applies to online savings accounts.
Can you withdraw money from a high-yield savings account?
Legally, consumers can withdraw or transfer funds from high-yield savings accounts up to six times a month without incurring fees.