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How High-Yield Savings Accounts Work

By Janet Siroto · March 10, 2023 · 13 minute read

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How High-Yield Savings Accounts Work

Savings accounts are where you stash cash that you want to keep secure and watch grow. But with the average interest rate on savings accounts at just 0.23% as of March 1, 2023, that isn’t going to do much to pump up your money, whether you have cash set aside for a vacation in Rio or for retirement.

But there are ways to earn more on your money while keeping it in a low-risk place. Specifically, you could open a high-yield savings account.

High-yield (aka high-interest) savings accounts often pay considerably more than standard savings accounts. As of March 2023, some offered annual percentage yields (APYs) of up to 4.55%.

Whether held at a traditional bank, online bank, or credit union, these accounts can keep your money liquid (meaning it’s nice and accessible), plus they don’t expose you to the risk that may accompany investing. However, you may have to meet a high initial deposit requirement or maintain a significant balance to reap that enticingly high interest rate.

To help with the decision about where to keep your funds, this guide covers important terrain, including:

•   What is a High-Yield Savings Account?

•   How Do High-Yield Savings Accounts Work?

•   How to Use a High-Yield Savings Account

•   Benefits of a High-Yield Savings Account

•   Disadvantages of a High-Yield Savings Account

•   What to Look For in a High-Yield Savings Account

•   How to Open a High-Yield Savings Account

•   How Do High-Yield Savings Accounts Compare to CDs?

•   FAQ

What Is a High-Yield Savings Account?

First, an answer to the question, What is a high-yield or high-interest savings account? It’s a savings vehicle that functions similarly to a traditional savings account. These accounts, however, typically pay considerably higher interest rates than traditional savings accounts and almost always offer better returns than traditional checking accounts.

You may wonder, is a high-yield savings account worth it? For many people, the answer will be a resounding yes. 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. In other words, you make money on both your money and the interest, helping your funds grow.

You may be able to open a high-yield savings account at a variety of financial institutions, but the highest rates are often available from online banks vs. traditional banks or credit unions.

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 times per month. Exceeding that withdrawal limit may trigger a fee. (Worth noting: 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. Check with your institution to be sure.)

Earn up to 4.60% APY with a high-yield savings account from SoFi.

Open a SoFi Checking and Savings account and earn up to 4.60% APY - with no minimum balance and no account fees.


How Are High-Yield Savings Different Than Regular Savings Accounts?

As briefly mentioned above, the average savings account interest rate is currently 0.23% (that’s right, a mere fraction of a percentage point). What’s more, many of the nation’s biggest banks pay significantly less than that – only around 0.01%. Yes, it’s better than nothing, but not by much!

Here’s how the math works out: 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, assuming no compounding occurred.

Disappointing, to say the least! So if you’re looking to make more on your savings, one option to consider is a high-yield savings account (which may also be called a growth 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.

How Do High-Yield Savings Accounts Work?

How a high-yield savings account works is very similar to how other savings accounts operate.

•   You make an initial deposit to open the high-interest account, while also sharing identification and other personal information with the bank or credit union.

•   You can then add to your account as you see fit.

•   You can also take money out of the account (there may be a cap on how many times a month you can do this, however), either withdrawing it or transferring it to another account.

Your account may also have minimum balances and monthly fees. This will vary with the institution. While traditional banks and credit unions may offer these accounts, it is common to find them at online banks, which have a lower overhead and can pass the savings on to you. You may find accounts that have no fees, like a SoFi Savings Account.

In many cases, your funds will be protected by either FDIC or NCUA; check with your financial institution to know the coverage limits in place.

How much interest will I get on $1,000 a year in a savings account?

Your interest will depend on where you stash the $1,000. If you put it in an account that gets only 0.01% APY, your earnings after a year would be 10 cents. In a high-yield savings account that earns 3.75% APY, you’d earn $37.50, without any compounding.

Those are the basics on how a high-yield savings account works. There’s one other angle to consider, however. It’s worth noting that the money you keep on deposit at a bank is used by the financial institution for other purposes, such as loans to their customers. That is why they pay you interest: They are compensating you for being able to do so.

How to Use a High-Yield Savings Account

A high-yield savings account can be used for a variety of purposes, just as other types of savings accounts can be.

Building an Emergency Fund

It may be a good place to build an emergency fund that is your safety net in case you have an unexpected car or household repair needed. You typically want to have a three to six months’ worth of living expenses available, but you can certainly start one of these accounts with less and add to it.

Saving for a High Value Purchase

Perhaps you are saving for a car, a cruise, or other big-ticket item. Or maybe you are getting close to having enough money for a down payment on a house. A high-yield savings account can be a secure, interest-bearing place to park those funds until you are ready to use them.

Saving Surplus Money

A high-yield account can also be a great place for any extra cash for which you may be figuring out next steps. Perhaps you received a tax refund or a spot bonus, or you are selling your stuff that’s no longer needed on eBay. That extra cash can go into a high-yield savings account rather than sit in your checking account, potentially earning zero interest.

Separating Your Money

Sometimes, setting up an additional savings account (or two) can help you organize your money. Perhaps you want to have multiple savings accounts to help you achieve different goals, such as an account for future educational expenses and one for paying estimated taxes on your side hustle. As you save money towards each of those aims, you might as well accrue some interest. A high-yield savings account will help you do that, and let you check on how your cash is growing towards each goal.

Benefits of a High-Yield Savings Account

There are definitely some big pluses to opening a high-yield savings account. Here are some of the main ones:

•   The interest rate, of course! It is typically many times that of a traditional savings account or a CD.

•   It’s a secure place to deposit funds when you are savings towards a relatively short- or medium-term goal (say, building an emergency fund, or saving for a down payment, a wedding, or another purpose)

•   These accounts often come with no fees, zero! Typically, this is the case with online banks rather than bricks-and-mortar ones or credit unions.

Recommended: How Much Money Should You Have Left After Paying Bills?

Disadvantages of a High-Yield Savings Account

You know the saying, “Nobody’s perfect”? It holds true for high-yield savings accounts, too. These accounts may not suit your needs for a couple of key reasons.

•   While the interest is higher than your standard savings account, it may not be able to compete with other financial products (such as stocks) for long-term savings, like retirement. In fact, it may not even keep pace with inflation. So if you are able to take some time and take on a degree of risk, you may be better off with stocks or mutual funds to reach some financial goals.

•   More restrictions and/or requirements may be part of the package. For instance, you may need to deposit or keep a certain amount of money in the account, especially for those high-yield accounts offered by traditional banks. Or might need to set up direct deposit or automate bill payment.

•   Less access may be an issue. It may take more steps and/or more time (perhaps a couple of days) to transfer funds when you have a high-yield savings account.

What to Look For in a High-Yield Savings Account

Ready to explore high-yield savings accounts a bit further? Here are a few things to look for (and to look out for) when considering a high-yield 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-yield 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-yield 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 and not on any additional funds you may deposit.

Bank Account 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.

Links to Other Banks and/or Brokerage Accounts

Make sure you know whether you can link your high-yield savings account and other accounts you may hold. There could be restrictions on connecting your account with other financial institutions or there might be a waiting period.

Withdrawing Your Money

You’ve just read that it may be a bit more complicated or time-consuming to get your funds transferred. You should also check to see how withdrawals can be made. For instance, would it be possible to pull some funds out of your high-yield savings at an ATM? Your financial institution can answer that question.

Compounding Method

It’s up to the bank whether they compound interest daily, monthly, quarterly, or annually — or at some other cadence. Compounding interest more frequently can boost your yield if you look at the APY versus the annual interest rate (the latter takes into account the compounding factor btw).

Recommended: 52 Week Savings Challenge

How to Open a High-Yield Savings Account

Now that you’ve learned about high-yield savings accounts, you may be ready to say, “Sign me up!” If so, a good first step is to take a look at your current bank and see if they have a high-yield savings account available — that could be the quickest, easiest path forward.

If not, look for an account and interest rate that speaks to you, and move ahead. Most high-yield savings accounts can be easily opened online with such basic information on hand, such as your driver’s license, your Social Security number, and other bank account details.

How Do High-Yield 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 (ouch). 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-interest savings accounts is that with CDs, the interest rate is guaranteed. With savings accounts, interest rates are not guaranteed and can fluctuate 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 with a higher rate than what high-yield savings accounts offer.

Make the Most of Your Money With SoFi

If you’re ready to amp up your money, a SoFi Checking and Savings account can help. We make it easy to open an online bank account and — if you sign up for direct deposit — you’ll earn a competitive APY on a qualifying account. Need more incentive? How about this: SoFi has zero account fees and offers Vaults and Roundups to further grow your cash. Plus, you’ll spend and save in one convenient place.

Better banking is here with up to 4.60% APY on SoFi Checking and Savings.

FAQ

Can you lose money in a high-yield savings account?

In most cases, you likely won’t lose money with a high-yield savings account. If your account is held at a financial institution insured by FDIC or NCUA, you are covered in the rare event of a bank failure for up to $250,000 per account category, per depositor, per insured institution. That said, you might lose money vs. inflation if the rate of inflation exceeds that of the APY on your high-yield savings account.

Is a high-yield savings account a good idea?

A high-yield savings account can be a good idea. It provides significantly higher interest than a standard savings account, but offers the same security and easy access/liquidity.

Can I withdraw all my money from a high-yield savings account?

You can withdraw all your money from a high-yield savings account. One of the benefits of this kind of account is its liquidity. If you are ready to close the account, check with your financial institution about their exact process for doing so.

Are there any downsides to a high-yield savings account?

There are some potential downsides of a high-yield savings account. While these accounts earn more interest than a standard savings account, they may not keep pace with inflation nor how much you might earn from investments. There may be restrictions at some financial institutions, such as a minimum balance requirement and withdrawal limits. While the funds are liquid, access may require some maneuvering. Transfers may take longer, and if you keep your funds at an online bank, you cannot walk into a branch to take out cash.


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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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