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High Interest Savings Accounts: The Risks, The Benefits, and What You Should Know

June 03, 2021 · 5 minute read

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High Interest Savings Accounts: The Risks, The Benefits, and What You Should Know

It can be frustrating to see your extra cash sitting in a checking or savings account earning little to no interest. You may even feel like you are going backwards, thanks to inflation.

If you’re looking for a low-risk place to put your cash that pays more interest than you’re currently getting in the bank, you may want to consider opening a high-interest savings account.

Offered by traditional banks, online banks, and credit unions, high-interest (also called high-yield) savings accounts often pay significantly more than standard savings accounts, yet keep your money liquid and don’t involve the risk that can come with investing.

There may be restrictions involved, such as a high opening and ongoing minimum balance, however, in order to earn that higher rate.

Here’s what you need to know when shopping for a high-interest savings account, and how these saving vehicles stack up against traditional savings accounts and CDs.

Savings Account Interest Rates

Interest is what a bank pays you in order to use your money to make loans and other investments. Annual percentage yield, or APY, is the amount of interest you earn per year on your savings. A high APY will help your savings grow year over year.

Unfortunately, the average savings account interest rate is 0.06%, and many of the nation’s biggest banks pay significantly less than that–only around 0.01%.

If you had $5,000 in a savings account earning 0.01% per year, you would only earn 50 cents for the entire year it sat in your savings account.

If you’re looking to make more on your savings, one option to consider is a high-interest savings account.

These savings vehicles can be a good place to put money you’re saving for short-term financial goals, since they can help you get a higher-than-average return on your money, but still allow relatively easy access to your cash.

What is a High-Interest Savings Account?

A high interest, or high-yield, savings account, functions similarly to a traditional savings account. These accounts, however, typically pay a higher interest rate than traditional savings accounts, and almost always offer better returns than traditional checking accounts.

Even a difference of one or two percent can add up over time, thanks to compounding interest–that’s when the interest you earn also starts earning interest after it’s added to your account.

You may be able to open a high-yield savings account where you already bank, but the highest rates are often available from online banks.

Depending on the financial institution, a high-yield savings account will likely be insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per depositor.

Like other savings accounts, withdrawals from high-yield savings accounts may be limited to six per month, and going over the withdrawal limit may trigger a fee.

While federal regulation had required all savings accounts to limit withdrawals to six per month, that rule was lifted due to the coronavirus pandemic. Institutions can now decide if they want to allow more than six transactions per month.

A high-interest savings account can be a good place to build an emergency fund or to save for a downpayment on a home, vacation, or another big purchase.

How Do High Interest Savings Accounts Compare to CDs?

Another option you can use to grow your savings is a certificate of deposit or CD.

A CD is a type of deposit account that can pay a higher interest rate than a standard savings account in exchange for restricting access to your funds during the CD term — often between three months and five years.

Interest rates offered by CDs are typically tied to the length of time you agree to keep your money in the account. Generally, the longer the term, the better interest rate.

When you put your cash in a CD, it isn’t liquid in the way it would be in a savings account. If you want to withdraw money from a CD before it comes due, you will typically have to pay a penalty. This could mean giving up a portion of the interest you earned, depending on the policy of the bank.

Another key difference between CDs and high-yield savings accounts is that with CDs the interest rate rate is guaranteed. With savings accounts, interest rates are not guaranteed and can change at any point.

A CD can be a good savings option if you’re certain you won’t need to access your cash for several months or years, and you can find a CD that has a higher rate than you could make in a high-yield savings account.

What to Look For in a High-Yield Savings Account

While high-interest savings accounts can offer higher-than-average interest rates, they often come with certain caveats and requirements in order to earn that higher rate. These restrictions might include setting up direct deposit, automating bill payment, or maintaining a minimum balance.

Here are a few things to look for (and to look out for) when considering a high-yield savings account.

Annual percentage yield (APY)

One of the most important factors to look for in a savings account, the APY is how much you’ll earn in returns in one year. Some accounts will specify that the currently advertised rate is only available for an initial period of time, so that can be something to keep in mind.

Required Initial Deposit

Many high-interest savings accounts require a minimum opening deposit. If that’s the case, you’ll want to make sure you are comfortable depositing that much at the outset.

Minimum Balance

Some banks require you to maintain a minimum balance to keep your high-yield savings account open. You’ll want to feel comfortable with always meeting the minimum threshold because falling below it can trigger fees or mean you won’t get the interest rate you’re expecting.

Ways to Withdraw or Deposit Funds

Banks all have their own options and rules for withdrawing and transferring funds. Options might include ATM access with an ATM card, online transfers, wire transfers, or mobile check deposits. Withdrawals may be limited to six per month.

Balance Caps

A balance cap puts a limit on the amount of money you can earn interest at the high-interest account rate. So, for example, if an institution offers 3% interest on your savings account, but sets a balance cap at $2,000, you would only grow that interest on the first $2,000.

Fees

It’s a good idea to understand what, if any, bank fees may be charged–and how you can avoid them, such as by keeping your balance above the minimum threshold or minimizing withdrawals per month.

The Takeaway

If you have more money in your checking account than you need to cover your daily transactions, a high-yield savings account can provide an opportunity to earn a higher-than-average interest rate on your surplus cash.

High-yield savings accounts also come with more flexibility than CDs and less risk than other investments.

Before choosing to put your money in a high-interest savings account, however, it’s a good idea to do your homework in order to find an account that will maximize your earnings and also let you avoid fees without imposing restrictions that don’t fit your needs.

Looking for Something Different?

Another great option to grow your savings is to open a cash management account, such as SoFi Money®. With SoFi Money, you can earn a competitive interest rate, spend, and save–all in one account.

With SoFi Money’s special “vaults” feature, you can separate your savings from your spending and also set up recurring deposits to help you achieve your savings goals faster. And, SoFi Money doesn’t have any account fees, monthly fees, or many other common fees.

Earn competitive interest on your savings with SoFi Money.



SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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