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

By Janet Siroto · April 13, 2022 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

High-Yield 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 mere fractions of a percentage point in interest — if anything at all! You may even feel like your finances are going backwards, thanks to inflation.

But wait: You have options! If you’re looking for a low-risk place to put your cash that pays more interest than you’re currently getting, you may want to consider opening a high-yield savings account.

Offered by traditional banks, online banks, and credit unions, high-yield (also called high-interest) savings accounts often pay significantly more than standard savings accounts. What’s more, they keep your money liquid (meaning it’s nice and accessible), and they 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-yield savings account, and how these saving vehicles stack up against traditional savings accounts and CDs.

What is a High-Yield Savings Account?

Let’s answer 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? 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 bricks and mortar bank or credit union, 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 exceeding the 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.)

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

Unfortunately, the average savings account interest rate is currently 0.05% (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 something, but it isn’t much! If you had $5,000 in a savings account earning 0.05% per year, you would only earn $2.50 for the entire year it sat in your savings account.

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.

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.

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How Do High-Yield Savings Accounts Work?

High-yield savings accounts work in a way that is very similar to other savings accounts. 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 SoFi’s Checking and Savings.

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 1.25% APY, you’d earn $12.50.

How to Use a High-Yield Savings Account

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

A high-yield account can also be a great way to save for a downpayment on a home, vacation, or another big purchase. The higher interest can really make a positive difference. And it’s also a fine place to park some extra cash that might otherwise be sitting in checking, earning zero interest.

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.

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’s probably not going to be able to compete with other financial products 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.

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.

Accessing Your Money

We’ve just mentioned the fact 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?

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).

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. It will likely take 15 minutes or so if you have the materials you need on hand. This usually means your driver’s license, your Social Security number, and other bank account details. Once signed up, you’ve entered the world of high-yield savings – welcome!

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 a 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

Hey, we can help you amp up your savings as well, with SoFi Checking and Savings®. We make it easy to open an online bank account and — if you sign up for direct deposit — you’ll earn a competitive 1.50% APY on a qualifying account. Need more incentive? How about this: SoFi has zero account fees, monthly fees, or overdraft fees.

Earn competitive interest on your savings with SoFi Checking and Savings.

FAQ

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

As long as you put your money in an account that has FDIC or NCUA coverage, you are protected for up to $250,000.

Is a high-yield savings account a good idea?

A high-yield savings account can be a good idea if you want to earn more than the current interest rate on a standard savings account and don’t want to tie your money up for too long (as with some CDs) or take on risk (as with stocks and mutual funds).


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.50% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.90% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.50% APY is current as of 06/28/2022. Additional information can be found at http://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.
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