How Do High-Yield Savings Accounts Work?

Jennifer Wills

Oct 8

2 min read

A high-yield savings account earns an above-average interest rate while letting you access your funds like a traditional savings account. The interest rate, known as the annual percentage yield (APY), can fluctuate as the Federal Reserve changes its benchmark interest rate.

Like traditional savings accounts, high-yield savings accounts generally let you access cash as needed and might include a debit card. These accounts are federally insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000.

How High-Yield Savings Accounts Work

Most savings accounts offer compound interest weekly or monthly. You earn a return on the principal balance and the interest. The more frequently your interest compounds, the higher your return.

Limitations of a High-Yield Savings Account

High-yield savings accounts can have the following limitations:

A minimum opening deposit or balance requirement to earn a higher yield.
Limited monthly withdrawals or transfers.
Fees for out-of-network ATMs or overdrafts.

Ensure you understand the requirements before opening a high-yield savings account.

Benefits of a High-Yield Savings Account

The benefits of a high-yield savings account include:

Higher returns: Annual percentage yields on a high-yield savings account can exceed 10 times the return on a traditional savings account.
Lower risk: The FDIC typically insures the accounts up to $250,000 per account.
Fewer fees: Many high-yield savings accounts have no minimum deposit or monthly fees.

Drawbacks of a High-Yield Savings Account

The drawbacks of a high-yield savings account include:

Fluctuating interest rates: Because economic factors influence APYs, the rates can change at any time.
Few brick-and-mortar locations: Online-only institutions typically offer the best interest rates because of lower overhead costs.
Withdrawal and transfer limits: Many high-yield savings accounts restrict how you can move your money.

Factors to Consider When Opening a High-Yield Savings Account

Consider the following before opening a high-yield savings account:

Deposit requirements: Many accounts require a minimum deposit, typically ranging from $0 to over $100.
Interest rate: Some high-yield savings accounts offer higher yields than others, which impacts your returns.
Fees: Maintenance, overdraft, and ATM fees affect the total return.

*This information is for educational purposes only.

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