How Do High Yield Savings Account Work?

Putting aside money safely is easy if you don’t expect any return on your savings. Burying it in the backyard is low risk as long as you remember where you buried it.

However, since it’s a bad idea not to earn at least a little interest on your money, the question becomes how to maximize your returns while making sure your money will be there whenever you need it. Fortunately, there are options besides low-interest traditional savings accounts.

High-yield savings accounts are among a handful of options that provide a considerably better return than traditional savings accounts but also avoid the risks of the stock market, where you can lose some or even all of your investment. Since some high-yield accounts are better than others, you need to know what to look for.

High Yield Savings Accounts – What Are They?

High-yield savings accounts are deposit accounts that offer variable but higher interest rates than traditional savings account. They’re typically available at online banks and offered at some brick-and-mortar financial institutions. You can make deposits and withdrawals, just as with traditional savings accounts.

High-yield savings accounts give you access to your money, but they may have withdrawal limits. Also, you may be required to maintain a minimum balance to earn the best interest rate.

Interest Rates

The big difference is the interest. The best interest rates for high-yield savings accounts are available in the range of 5.3% annual percentage yield (APY) or higher. That’s almost 12 times higher than the national average for savings accounts, which was 0.45 percent in 2024. The higher the interest, the faster your money grows.

Those higher rates, however, are not locked in as they are in traditional savings accounts or certificates of deposit (CDs), which have fixed rates for a set time period. High-yield savings account rates can change any time the Federal Reserve alters interest rates.

Compound Interest

There’s a reason high-yield savings account interest rates are listed in terms of APY instead of annual percentage rate (APR), which is the simple interest rate over one year. APY takes describes the effect of compound interest, which is an important feature of these accounts.

It’s not just the money you deposited that grows in high-interest savings accounts. The interest that your money earns itself generates interest, which grows your account faster. That’s what compound interest means. Some accounts compound daily, and others monthly, and the more frequently the interest compounds, the more it grows.

Pros of Using High-Yield Savings Accounts

High-yield savings accounts have many benefits that make them worth considering as a place to grow your money without the risk of other investments.

Reach Money Goals Faster With Higher Returns

The most obvious advantage of high-yield savings accounts is that your money should grow faster than traditional savings accounts, which enables you to reach your money goals sooner as part of your overall saving and investing strategy. Whether you’re saving for a vacation, to buy a house or to build up an emergency fund, the advantage of higher rates and compound interest can’t be ignore/financial-literacy/budgeting-saving/saving-and-investing-for-life/d.

Hedges Against Rising Inflation

Traditional savings accounts are a little better than burying your money in your backyard, but neither will prevent inflation from robbing your savings of some of its value. That’s just one difficulty of trying to budget during inflation. Although inflation rates fluctuate, from 1960 to 2022, the average annual inflation rate was 3.8% per year. So, if your savings are earning less than that, you’re probably losing purchasing power.

Low Risk

High-yield savings accounts are very safe because they are insured by the Federal Deposit Insurance Corporation for up to $250,000 per depositor per insured bank. This also is true of conventional savings accounts, checking accounts, money market accounts and CDs. Although stocks, bonds, mutual funds and securities that lack FDIC insurance may offer higher returns, you can also lose money on such investments.

Low or No Fees

Most high-yield savings accounts don’t come with monthly maintenance fees, or the fees are waived if you keep your account above a minimum balance. No fees mean your account can keep piling up that compound interest.

Cons of Using High-Yield Savings Accounts

Despite the benefits, there are potential downsides to high-yield savings accounts, which aren’t guaranteed to grow as fast as you’d like and aren’t as flexible as traditional checking and savings accounts.  

Variable Interest

Although interest rates on high-yield savings accounts are generally higher than other safe alternatives, the interest rates can vary as economic conditions change. That’s different than money market accounts or CDs, which offer locked-in interest rates.

Minimum Balance Requirements

Banks may require a minimum balance to earn the best rate in a high-yield savings account, and you may be charged fees if you don’t maintain that balance.

Possible Transaction Fees

In addition to possible minimum balance fees, banks may charge fees for account maintenance, withdrawing money from the account or for paper statements.

Limited withdrawals

Banks often limit the numbers of withdrawals you can make per month. If you need more frequent access, a regular checking account may be what you need, even if will earn little or no interest.

How Do High-Yield Savings Accounts Compare to Money Markets?

High-yield savings accounts aren’t the only option for safely saving money at higher returns than traditional savings accounts. Money market accounts are another.

Money markets have higher returns than traditional savings accounts, but lower than high-yield savings accounts. But you will have more immediate access to your funds because money markets offer ATM withdrawals and limited check-writing access, and high-yield accounts don’t. However, there are transaction limits on money markets, so they can’t be used as frequently as traditional checking accounts. Money markets aren’t designed for everyday spending.

Money markets also have higher fees and minimum balance limits. You might be required to maintain account minimums of $5,000 to $10,000, and you may be charged a monthly maintenance fee. Minimum balance limits on high-yield savings accounts are typically lower, as little as $1,000.

How Do High-Yield Savings Accounts Compare to CDs?

CDs (Certificates of Deposit) usually offer fixed interest rates instead of variable rates, and those rates are usually higher than those of high-yield savings accounts. However, your funds are less accessible. You can’t withdraw any of your CD funds for a fixed period without paying a penalty, and you typically can’t add more money into the CD after the initial deposit.

How Do High-Yield Savings Accounts Compare To Traditional Savings Accounts?

Are you willing to have a little less flexibility to your funds to get a much higher interest rate? Or is it important to be able to withdraw funds as often as you like? That’s the basic tradeoff between high-yield savings accounts and traditional savings accounts. To offer the higher rates, banks may require you to initially deposit and maintain a minimum amount of money in a high-yield account.

Bottom Line

It’s an overused phrase, but one size doesn’t fit all when deciding where to park your savings. High-yield savings accounts are one of several options to save money while avoiding risk. The biggest factor in deciding if these accounts are right for you is determining how much flexibility you need in accessing the money you’re saving.

As with any financial option, whether to put money in a high-yield savings account should be decided in the larger context of how you set and achieve financial goals. What are your long-term goals? Short-term goals? Do you have a budget that clearly tells you how much money is coming in and what you’re doing with it? Do you have credit card or other debts you need to pay down? Are there big-ticket expenditures you need to save for like college or retirement? How will a high-yield savings account affect your taxes? It’s hard to decide what savings vehicle is right for you unless you have a clear idea of where you’re going.