Have you felt a sinking feeling in your bank account? The Federal Reserve has been lowering interest rates since late 2024, which is shrinking the rate of return most Americans earn on their savings deposits. If this accurately describes your banking game, it’s time to get a high-yield savings account.
“The vast majority of Americans still keep their cash in traditional brick-and-mortar banks, but they could be earning much more by depositing their money in high-yield savings accounts,” says Gary Zimmerman, CEO of cash management platform Max. “Since interest compounds over time, it’s important to make sure you’re always earning the highest rate possible.”
There’s only one thing that truly distinguishes a high-yield savings account from a regular savings account: High APYs. The former offers much higher yields than the latter, ensuring your savings balance grows faster. As of mid December, the national average savings rate was just 0.42%—compare that to online banks, some of which offer up to 5% APY—that’s 12 times the rate.
High-yield savings accounts are like high-performance cars
Here’s a great way to think about high-yield savings accounts: They’re different from regular savings accounts in the same way that sports cars perform better than regular sedans. While I love my 2013 Honda Fit, there’s no question that a Corvette goes from 0 to 60 in a fraction of the time.
Plenty of banks and credit unions offer what they call high-yield savings accounts, but the only ones that matter offer rates that are substantially higher than the average. The APY on a decent high-yield savings account should be anywhere from 6 to 12 times higher than the national average rate. You generally find the highest rates at online banks.
High-yield savings accounts can be useful for storing cash that you’ll need access to in the somewhat near future:
- Short-term goals: This could include vacations, home repairs, or any other expenses you’re planning to pay in the next few months.
- Emergency fund: Keeping an emergency fund separate from your other accounts can be incredibly helpful, as you’re less likely to pull from it for unnecessary purchases. Plus, any extra dollar you earn with a higher APY can be beneficial when paying for unexpected expenses.
- Larger purchases: The more you can save in advance for the down payment on a car or a house, the better rates you’ll be able to lock in.
What to consider when looking for a high-yield savings account
While a high APY gets the headline every time, there are other factors to consider before opening a new HYSA.
“Check for hidden fees like monthly maintenance or minimum balance requirements,” advises Brian Seymour, CFP, a financial coach based in Atlanta. “Look at the withdrawal limits, which can cap how often you can access your money without penalties. Pay attention to how interest compounds, since daily compounding works harder for you than monthly.”
Here are the main features to consider when evaluating a high-yield savings account:
- APY: Annual percentage yield represents how much interest you can earn in a year on the money in your savings account. There may be special hurdles to earn the highest available APYs, such as monthly deposit requirements or minimum balance thresholds.
- Fees: If a bank charges monthly maintenance fees or penalty fees if you don’t maintain a certain minimum balance, look elsewhere. There are plenty of fee-free HYSA options available.
- Initial deposit: Some financial institutions may require a minimum deposit amount, while others let you open the account without funding it immediately.
- Compounding frequency: Your bank may compound interest daily, monthly, quarterly, or annually. The more frequently it compounds, the more money you earn.
- Deposit insurance: Make sure you open an account with a bank that is insured by the Federal Deposit Insurance Corporation (FDIC) or a National Credit Union Administration (NCUA)-insured credit union.
- Withdrawal options: Some banks limit the amount of withdrawals you can make per month. It’s important to know your institution’s rules before signing on, especially if you plan on making frequent withdrawals.
- Other offerings: If you prefer to do all your banking at one institution, make sure it offers everything you’re looking for before signing up. Just keep in mind that many online banks that offer the best APYs don’t always have a full suite of conventional banking services.
“Ultimately, the most important thing is the actual user experience,” says Seymour. “Is there a mobile app? Is it easy to use and reliable? Are customer service options solid or are you stuck trying to communicate with a chatbot? A high APY doesn’t mean much if accessing your money is a headache.”
Pros and cons of a high-yield savings account
The advantages of a high-yield savings account make them a key part of your financial game plan:
- Higher APYs than conventional savings accounts
- Returns are not tied to day-to-day market fluctuations
- Accounts are insured against bank failure, up to the statutory limit
- You get to access the magic of compounding interest
- High liquidity means easy access to your money
There are some things to watch out for when you keep your money in a HYSA:
- Institutions may change the APY you earn on your deposit at any time
- There may be restrictions on the amount of withdrawals you can make each month
- Transfers between accounts are not instantaneous and may take time to complete
- If your APY falls below the annual rate of inflation, the purchasing power of your money can erode over time
Don’t be afraid to open multiple accounts
If you’ve found multiple banks that offer high APYs on savings and charge no fees, it sometimes makes sense to open multiple high-yield savings accounts. Having more than one open at a given time gives you options.
“To maximize your earnings, consider diversifying your savings across numerous online savings accounts, and then allocate your funds to whichever bank currently offers the best return,” says Zimmerman. “It’s best to keep your cash in a high-yield savings account, where it is safe, same-day liquid, and can earn a higher return.”
For people with more than a quarter million dollars in savings to play with, there’s an additional benefit to opening more than one high-yield savings account. Since the FDIC insures deposits up to $250,000 per depositor, per bank, it makes sense to deposit no more than $250,000 in each HYSA. Keep in mind that for joint accounts, the FDIC insurance coverage for each owner is calculated separately.
Other savings vehicle options
High-yield savings accounts are stellar for an emergency fund or large purchase where you want to keep easy access to your funds. However, they’re not the best fit for long-term savings goals, such as retirement. In these cases, a tax-advantaged retirement account like an Individual Retirement Account (IRA) or a regular brokerage account is likely to be a better fit.
Additionally, for other long-term goals, you may want to consider a certificate of deposit (CD). These involve locking your funds away for a certain time period (can be as short as a month or as long as 10 years), but doing so often gives you access to a higher APY.
The takeaway
If you’ve been using a traditional savings account, now might be a great time to consider switching to a high-yield option. Find an account with a high APY, look into what fees may be associated with the account and how to avoid them, then take the leap and watch your money grow.
