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What Exactly Is a High-Yielding Savings Account, and how it can grow your money

What Exactly Is a High-Yielding Savings Account?

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High-yield savings accounts differ from typical savings accounts in that they pay a greater interest rate, allowing your money to grow even quicker while it is in your account. The interest rate on these accounts is expressed as an APY or annual percentage yield.

If you have a checking account at your local bank, you most certainly also have a savings account.

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Many people keep their money in a savings account to receive interest and watch it grow over time. However, some savings accounts provide a far higher return than others, which is where high-yield savings accounts come into play.

While the national average return on a typical savings account is only 0.33%, a high-yield savings account earns significantly more interest on your investments. Many of these accounts will have interest rates of more than 4% by 2023.

As a result, people put their money in a high-yield savings account to help them reach their goals faster, whether they’re saving for something immediate, like a trip, or saving for a significant price down the future, like a down payment on a house.

CNBC Select explains what high-yield savings accounts are and how they function.

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What are high-yield savings accounts?

The interest rate on these accounts is expressed as an APY or annual percentage yield. The higher the APY on a specific savings account, the faster your money will grow.

It’s worth noting, however, that the APY offered by savings accounts when you sign up can change at any time. These rates are changeable and frequently rise and fall in response to changes in the Federal Reserve’s benchmark interest rate.

Even though the current economic situation has caused savings rates to fall recently, the highest-yielding accounts can still offer you more than 12X the amount of money as conventional savings accounts. With the national average APY on savings accounts at 0.33%, it’s extremely probable that no matter what your high-yield account offers, it will earn more than a standard savings account. Savings account APYs will rise as the Fed continues to hike interest rates.

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Not only does your money receive a higher rate of return in a high-yield savings account, but you still have access to it when you need it, just like in a regular savings account. Your money in a high-yield savings account should be federally guaranteed by the Federal Deposit Insurance Corporation (FDIC), which means deposits up to $250,000 are safe if the bank fails unexpectedly.

The Key Takeaways

High-yield savings accounts can offer interest rates that are 10 to 12 times greater than ordinary savings accounts.

The best rates are frequently only available from online banks.

Even if you have accounts at separate banks, electronic transfers between high-yield savings accounts and checking accounts are simple to set up.

Compare initial deposit requirements, interest rates, minimum balance requirements, and fees when looking for a high-yield savings account.

How high-yield savings accounts work

Compound interest allows your savings in a high-yield savings account to grow quickly.

Compound interest, as opposed to simple interest, means that you earn interest on both your principal balance and the interest it earns. Simple interest is computed just on your principal, or the balance in your savings account less interest.

The frequency with which your interest is compounded is determined by the savings account. Some compound daily, while others compound every month. The larger the compounding of interest, the greater the return.

With a high-yield savings account, you can withdraw or transfer funds (including electronic transfers, checks, and wire transfers) up to six times each month without incurring a penalty fee or risking the closure of your account.

While a high APY is important when selecting a high-yield savings account, you should also read the fine print. Because Internet banks do not have the overhead expenditures that traditional banks do, they may be able to offer a greater APY. However, it may need initial deposits, minimum balance requirements, and monthly fees, so read carefully.

Following are some of Select’s best recommendations, taking into account the aforementioned characteristics as well as considering ease of use and accessibility:

What To Look for in a High-Yield Savings Account

Compare choices throughout the marketplace while looking for a high-yield account at a new bank or opening one at your current bank. Differences in interest rates and fees might add up over time, especially if you have a sizable savings sum. Here are some things to check for and compare:

 Interest Rate
Required Initial Deposit
Minimum Balance Required
Fees
Links to Other Banks and/or Brokerage Accounts
Accessing Your Money
Deposit Options
Compounding Method

 1. Interest Rate

How much interest is currently paid on the account? Is it a standard rate or a special introductory rate?

Savings account interest rates are normally variable and can be modified at any time. However, some accounts will state that the currently stated pricing is only valid for a limited time. Another thing to consider is whether there are minimum or maximum balance requirements to earn the advertised rate.

2. Required Initial Deposit

What is the minimum deposit to open the account? Do you want to make the required minimum deposit?

3. Minimum Balance Required

How much money must you retain in your account? Failure to meet the minimum deposit requirement may result in costs that offset interest rate earnings.

4. Fees

Is there a cost for this account at the bank or credit union? If so, how can you avoid them (for example, always keeping your balance above the minimum threshold)?

5. Links to Other Banks and/or Brokerage Accounts

Will the bank allow you to link your high-yield savings account to other banks’ or brokerage firms’ deposit accounts? Is it possible to link numerous accounts? Is there a waiting period for new accounts?

6. Accessing Your Money

What other options, if any, are there for withdrawing funds? Can you use an ATM card to withdraw money from your savings account?

7. Deposit Options

Is the bank’s smartphone app for mobile check deposit available if you want to deposit checks into the account? Will you be able to send in checks or deposit them at an ATM if not?

8. Compounding Method

Interest can be compounded daily, monthly, quarterly, semiannually, or annually by banks. More frequent compounding should enhance your take-home pay. When comparing accounts by APY rather than the yearly interest rate, the compounding element is already factored in.

Understanding APY

When you deposit money into a savings account, the bank pays you interest for keeping your money with them. This interest is known as the annual percentage yield (APY), which indicates how much you could earn from your investment in a year. Simply open an account and begin making deposits, and you will begin receiving interest on your account at the rate and time specified by your bank.

Compound Interest

The difference between high-yield savings accounts and normal savings accounts is the interest rate. Although no defined percentage is deemed a “high” APY, having an interest rate that is higher than the national average can make a significant impact on the growth of your money. Because interest rates are continuously changing, financial institutions alter the APYs offered on their deposit accounts regularly, so the interest rate on your high-yield savings account may change.

How to Open a High-Yield Savings Account

It should be simple to open a new account if your bank offers a competitive high-yield savings account. Because you have already been authenticated with the university, there will most likely be little need to input personal information.

The procedure of opening a savings account at a new institution will be more extensive, but it should still be simple. Almost all high-yield savings accounts are available to open online. You will most likely be required to complete an electronic application with important personal information. Make sure you have your driver’s license, Social Security number, and primary bank account information with you.

How Do High Yield Savings Accounts Work? Withdrawals and Money Transfers

A high-return savings account can be linked to your checking account, allowing you to transfer funds quickly and simply using your bank’s mobile app or online. If you need money, you can transfer it to your connected checking account or withdraw it from an ATM. Some banks, however, may restrict you to six withdrawals or transfers every monthly cycle.

Where Can a Consumer Find a High-Yield Savings Account?

The best rates are available from online banks. Even so, you might be able to open a high-yield savings account at a bank where you already bank. Compare the rates and terms of various accounts.

What Are the Main Things To Look at in a High-Yield Account?

Compare initial deposit requirements, interest rates, minimum balance requirements, fees, links to other banks and/or brokerage accounts, access to your money, deposit alternatives, and compounding mechanisms.

Can You Withdraw Money From a High-Yield Savings Account?

Yes. Customers with consumer banking can withdraw or transfer funds from a high-yield savings account. Previously, you could only withdraw up to six times a month from a savings account, but that law will be repealed in 2020.

How to Calculate Interest on a High-Yield Savings Account

You can use the following formula to calculate how much interest you’ll earn from a high-interest account: P x R x N = Interest

• P is the principal amount

• R is the interest rate

• N is the period (usually 1 is used to represent one year)

Assume you have a high-yield savings account with a $5,000 deposit (P) and a one-year interest rate of 0.60% (R). Because 0.60% is divisible by 0.006, the formula is:

Interest = $5,000 x 0.006 x 1, which equals $30 in interest

You may also use our high-yield savings calculator to see how much you could make with Synchrony Bank against other major banks.

What Is the Average Interest Rate for High Yield Savings Accounts?

The interest rate on high-yield savings accounts differs depending on the financial institution. The amount of interest fluctuates based on the Federal Reserve’s interbank exchange rate.

When the Fed raises interest rates, banks typically raise the APY on their high-return savings accounts. When the Fed maintains low-interest rates, financial institutions typically offer lower rates.

Before the Great Recession of 2008, for example, some banks provided savings account rates as high as 6%.2 By 2009, the national savings account rate had dropped to an average of 0.2%.3

High-yield savings accounts frequently provide interest rates that are several times higher than the national average. Because the Fed has raised interest rates in recent years, the amount of interest offered by institutions has also climbed.

Are you trying to decide between two or three different high-interest savings accounts? Here are some things to consider while selecting the right account for you:

Benefits

High-return savings accounts have various advantages, including:

  • Higher interest rates
  • Flexibility
  • Risk-free saving
  • Good for achieving short-term savings goals.
  • Ideal for an emergency fund

1. Higher interest rates

Usually, it pays far more than the national average for a regular savings account. The Synchrony Bank High Yield Funds Account provides a competitive interest rate to assist you in growing your funds.

2. Flexibility

Your money is not locked in and can be cashed out at any moment without penalty. A high-return savings account’s flexibility is great for short-term savings goals such as preparing for a down payment on a property or a dream vacation. Keep in mind that, while banks are no longer required by law to limit the number of times you can withdraw your savings, some still do and may charge fees for exceeding their monthly limit.

3. Risk-free saving

Provides a fixed (but changeable) interest rate on all deposits. Your funds are also FDIC-insured.

4. Good for achieving short-term savings goals

High-yield savings accounts, with higher-than-average interest rates, make it easier to develop your savings pool and accomplish your short-term goals.

5. Ideal for an emergency fund

A high-yield savings account provides a secure, easily accessible location to save emergency money and increase financial resilience. You will earn interest on the money when it is not in use, and you will be able to withdraw monies as needed.

Downsides

There may be some drawbacks for some savers as well:

  • Not for daily banking
  • More requirements to open than a standard savings account
  • Not the best for long-term financial goals
  • Fluctuating interest rate

1. Not for daily banking

Savings accounts aren’t intended for daily banking; they’re a place to keep money you don’t want to use immediately. A checking account, on the other hand, is used for daily transactions such as grocery shopping and bill payment.

2. More requirements to open than a standard savings account

High-yield savings accounts may have tougher conditions, such as a larger initial deposit amount or withdrawal/transfer limits because they offer higher interest rates than normal savings accounts.

3. Not the best for long-term financial goals

While you will earn interest on a high-yield savings account, it will not be enough to keep up with inflation or meet long-term goals such as retirement savings.

4. Fluctuating interest rate.

In contrast to a CD account, the interest rate on a high-yield savings account is not fixed. The bank has the right to adjust the interest rate at any time.

How to Compare High-Yield Savings Accounts

• Interest rates
• Fees. 
• Customer service.
• Minimum balance and initial deposit.
• Compounding.

1. Interest rates

What exactly is the APY? Is this a special rate, and when does it expire? Is there a minimum or maximum balance requirement to earn the interest rates? Remember that the higher the APY, the greater the long-term growth on your account.

2. Fees

Examine the fees charged by various banks. High costs can deplete your cash, negating the benefits of a high-interest savings account. Instead, look for accounts with no fees, such as Synchrony Bank.

3. Customer service

Is the bank well-reviewed? Do they provide chat assistance or alternative methods of communication? Check that the bank you chose has good customer service so that you can get help if you have questions regarding your account.

4. Minimum balance and initial deposit

To start an account with some banks, you must deposit a particular amount of money. You may also be required to maintain a minimum balance for the account to remain open. Synchrony Bank’s high-return savings accounts have no minimum deposit or balance restriction.

5. Compounding

How is interest compounded at the bank? The amount of interest you receive depends on whether the interest rates are compounded daily, weekly, monthly, or yearly. The more frequently money is compounded, the larger your account will grow.

High Yield Savings Account vs. Money Market Account

Depending on the financial institution, money market accounts and high-yield savings accounts are both FDIC-insured and offer competitive interest rates.

There are, however, some significant variations between the two narratives. A money market account, unlike a high-yield savings account, frequently allows you to write checks. Furthermore, the interest rates offered by a money market account may be lower than those offered by a high-yield savings account. A money market account may make more sense if you need to access your funds quickly utilizing checks.

High Yield Savings Account vs. Certificate of Deposit

When you put money into a CD account, you can’t touch it until the maturity date. However, with a high-interest savings account, you can withdraw or transfer funds whenever you want.

If you know you won’t need your assets for a long time, a CD is a preferable option. A high-yield savings account, on the other hand, maybe a better alternative if you require flexibility in accessing your savings. A CD is worth considering for savers who wish to lock in their interest rate, as interest rates for high-yield savings accounts frequently change.

High Yield Savings Account vs. Checking Account

A checking account is intended to handle daily transactions. As a result, a checking account typically earns little or no interest when compared to a high-yield savings account. People who have two types of accounts are not uncommon. A high-return savings account is ideal for putting money aside for a rainy day fund, whilst a checking account is excellent for day-to-day expenditures.

Explore Synchrony Bank’s High Yield Savings Account

With so many financial products available, it’s critical to pick one that matches your needs. A high-yield savings account is a wonderful place to start if you want to develop your wealth but don’t want to risk your money in the stock market or have it tied up in a CD. And, with greater flexibility and better yields than a traditional savings account, it’s an excellent alternative to think about as you plan your financial future.

In conclusion

A high-yield savings account might be an excellent place to hold money that you do not need right away but want to have quick access to. It provides higher returns than a regular savings account while being low risk due to federally guaranteed deposits of up to $250,000. Consider the advantages and disadvantages of high-yield savings accounts in comparison to other options, such as investment accounts. Then, evaluate the terms of other accounts to pick the one that best meets your objectives and personal situation.

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