What is the difference between a high-yield savings account and a traditional savings account? It all boils down to how much you can earn in interest rates. High-yielding savings accounts offer interest rates around 20 – 25 times higher than your traditional savings account. So even if you only have $1,000 kept in the bank, it can earn you a decent profit in the long run.
Are you curious about how to save money and generate passive income this way? Read on to learn more.
High-Yield Savings Account Meaning
What is a high-yield savings account? It works in the same way as a traditional one. These accounts offer you a secure place to keep your money, whether it be for the short or long term. The only difference is that your money earns more in a high-yielding account, making it one of the best options for safe investments.
They are offered by traditional banks, as well as various credit unions. You also have online options, which typically offer higher interest rates to clients because their operating costs are much lower compared to brick-and-mortar financial institutions.
The minimum deposit requirements for high-yield savings accounts will also vary from one bank to another. In fact, it is possible to open one with no initial deposit required, while others have a minimum of $100 to get started. If you want to start a small but safe investment, this is a good option to look into.
In terms of security, a high-yield account is protected by the Federal Deposit Insurance Corporation or FDIC, only if they are held at an FDIC-insured bank. Similar to other savings accounts, protection limits will apply per financial institution, per depositor, and according to the account ownership category. If you’re planning on keeping a significant amount of your wealth in such an account, it’s best to study the applicable protection limits your bank can offer.
High-Yield Savings Account Interest Rate
The high-yield savings account rates offered by the brick and mortar banks is quite less compared to what high-yield savings accounts offer. On average, the annual percentage yield or APY offered by the brick-and-mortar bank savings account is about 0.07%; whereas, the APY of your high-interest savings account offers above 1% and even up to 2% for some online accounts.
Interests are compounded on a per-day basis and paid every month. The longer the money is saved, the more interests are attracted because more interests are placed on the already paid interests.
The annual percentage yield of banks varies according to the banks. For instance, if the annual percentage yield of your bank is 1% and you have saved $1,000, you would get an interest of $10 giving you a total of $1,010. Most annual percentage yield of the best high-yield savings accounts is up to 1.7%. Saving $1,000 with these banks would give an interest of $17, giving you a total of $1,017.
How to Choose the Best High-Yield Savings Account
1. Interest Rate and Annual Percentage Yield or APY.
One of the first things you should look at are the account’s interest rate and APY. These will give you an idea of the interest-earning potential of that particular high-yield savings account.
The annual percentage yield adds the interest earned from the first deposit and those made from other earned interest. In choosing a high-yield savings account, it is better to choose the one with a higher annual percentage yield, whose rates are not frequently changed.
2. Minimum Deposit Requirements.
Most high-yield savings accounts require a minimum amount of deposit for opening an account. Although, some do not require any minimum amount of Choose a high-yield savings account with a low or no minimum amount deposit to open an account.
3. Fees and Other Costs.
Fees can eat away at the interest you earn from your savings. This is why it’s important to check any fees that apply to your account. When comparing your options, look for any monthly maintenance fees, minimum balance fees, and other miscellaneous ones.
If you plan on opening a high-interest savings account online, note that access to ATM or branch banking isn’t always an option. Make sure you’re aware of the methods available to you when depositing or withdrawing money from your account.
5. Online and Mobile Banking.
Not all online and mobile banking apps are created equal. While they all promise convenience, it is still important to check reviews on how reliable these options are. Is the app user-friendly? Is their website prone to downtimes? All of these factors can affect your digital banking experience so make sure you do enough research beforehand.
6. Customer Service.
As with any service provider, it is important that you’re able to receive help when you need it. Great customer service is also a reflection of how reliable a company is so this is something you should consider as well. What type of customer support options are available to you? Whether by phone or through live chat, they should be available when needed.
Take your time shopping around for the best high-yield savings account that best meets your needs. Always compare all the factors that matter to you, aside from what we have discussed above. The account should fit your lifestyle and current financial situation to ensure that everything goes smoothly in the long run.
How to open a high-yield savings account? The process is similar to other types of savings accounts. You will need to provide the financial institution with information such as your name, current address, and social security number.
They will also ask for routing and account number information for the bank account you are making the initial deposit. Opening your high-interest savings account is easier online, but we suggest doing it the way you’re most comfortable.
10 Best High-Yield Savings Accounts
Our list of the best high-yield savings accounts was based on their minimum deposit amount required for the account creation, the annual percentage yield, how often the interest rates change, minimum account balance, and means of accessing money (withdrawal options such as ATM or debit card), and a lot more. We have put together both online and brick-and-mortar options for you to choose from.
1. Barclays Bank – 0.70%
Barclays is one of the more traditional banks on our list, which is great if you’re still reserved for online banking. Their high-yield savings account is one of the most competitive on our list, earning 0.70% in annual percentage yield. There is no minimum balance required to open an account with them and there are no monthly fees either. If you’re looking for the best savings accounts, make sure you check out what Barclays has to offer.
2. Ponce Bank – APY: 0.75%
If you’re more traditional and have more confidence in banks with physical locations, give Ponce Bank a try. They might be a relatively smaller financial institution, primarily located in New Jersey and New York, but they offer competitive interest rates for their high-yield savings account. You can earn 0.75% on your full balance, and you only need a minimum of $1 to open an account with them.
3. Marcus by Goldman Sachs – APY: 0.60%
Marcus Goldman Sachs online savings account is great for people looking for a recognized financial institution to put their trust in. They offer consistent high rates, no minimum balance, and no extra fees. Note that they don’t offer mobile check deposits, so if this is how you plan on adding to your money, you might encounter some difficulty with that.
4. American Express Online Savings – APY: 0.60%
Most people know of American Express as a credit card company, but they also offer competitive rates for high-yielding savings accounts. American Express savings is quite consistent and only require a minimum of $1 to open an account. Another key thing to note about the American Express high yield savings account is that it does not come with a mobile app or an ATM access. To access your funds, you’ll have to do everything online. This might work for some, but consider this if you want better accessibility.
5. Synchrony – APY: 0.60%
Synchrony Bank is one of the original high-yield savings account offerings online. It gets top marks for consistency as well as accessibility. This account comes with an ATM card with ATM reimbursements. You don’t have to worry about monthly fees either and it has no balance requirements. That said, it is not a full-service bank so you won’t be able to visit any physical branches if you ever need to.
6. Alliant Credit Union High-Rate Savings – APY: 0.60%
Alliant’s high-yielding savings account requires a $100 minimum balance, but you wouldn’t need to pay a monthly fee if you choose e-statements. With Alliant Credit Union, you can open 19 separate, supplemental accounts which you can assign with their own nickname. Aside from savings, they also have a high-rate checking account with a $0 minimum balance and 0.25% APY.
7. Capital One – APY: 0.60%
Capital One is a familiar name for many. The credit card company has reliable banking products, though not everyone is aware that they also have competitive online savings accounts. Among which is their high-yield savings account that comes with a 0.60% APY. There’s no minimum amount required to open one, and it doesn’t come with any monthly maintenance fees either. So if you’re looking for a brand-name financial institution to make safe investments in, consider Capital One’s high-interest savings accounts.
8. Ally Bank – APY: 0.50%
Ally Bank is a solid online bank with a great history and plenty of other products for people who prefer online-only banking. Their high-yield savings account is very competitive, although they don’t have the highest APY. Ally Bank savings rate aside, you don’t need a minimum deposit to get started and they don’t charge monthly service fees either. The Ally high yield savings account doesn’t offer ATM cards, though, so you’ll have to do a wire transfer, an online funds transfer, request a check, or do a telephone transfer to access your funds.
9. Liberty Savings Bank – APY: 0.56%
Liberty Savings Bank is another brick-and-mortar financial institution that offers online high-yield savings accounts. A huge corporation may not run them, but rest assured that your funds are secured since the Federal Deposit Insurance Corporation protects them. To open an account, you only need $1 and there are no minimum balance requirements or maintenance fees. At a 0.56% annual percentage yield, it is one of the most competitive options out there.
10. Varo Bank – APY: 0.50%
Varo Bank is an online-only bank. If you prefer doing business in person, then it may not be a good match. That said, Varo offers one of the more competitive high-yield savings accounts at present. Not only that, but they also don’t charge monthly fees on both their bank and savings accounts. You don’t need to worry about ATM fees, overdraft fees, transfer fees, foreign transaction fees, and monthly maintenance fees. That said, it is important that you don’t exceed $5,000 on your savings balance or you risk losing the high APY.
Benefits of a High-Yield Savings Account
High-yield savings accounts provide people with a secure way of keeping their savings until they are needed. When it comes to investing for beginners, these types of accounts are also great products to start with since they earn a profit without too much risk. Other purposes high-yielding savings accounts can be beneficial for include:
- Emergency fund
- Vacation fund
- Wedding fund
- Paying for medical expenses
- Business capital
- Purchasing a car
- Planning for college
- Buying a house
If you plan on using your high-interest savings account for retirement, you might be better off with products specific to that. There are tax-advantaged retirement accounts or taxable investment accounts that will provide you with more room for growth. Nonetheless, including high-yield accounts are safe investments toward your financial goals.
Generate Passive Income with a High-Yield Savings Account
These days, simply relying on your fixed income may not be enough to help achieve your financial goals. Since you’re already putting money away for future use, why not ensure that it isn’t just sleeping in the bank? With a high-yield savings account, your money will earn you profit the longer you keep it, and the more you add to it. How’s that for motivation when it comes to not spending? Select from our list of the best savings accounts and find one that best fits your needs and preferences.
If you’re looking for more ways to save money, here are some money-saving challenges you can try.