What is a High-Yield Savings Account?

It’s all about the interest

Warren Buffet, one of the wealthiest people in America, has some advice for anyone thinking about putting money in a savings account: “The most important investment you can make is in yourself.”1

A really good starting point for investing in yourself is a savings account. The key is to find a bank account that’s right for you. One popular type of account is a high-yield savings account.

What does a high-yield savings account mean?

So, what is high-yield savings vs regular savings? Simply put, a high-yield savings account—sometimes called a high-interest savings account—is a bank account that often has a higher interest rate or annual percentage yield (APY) than a traditional savings account.2 When checking out your high-yield savings account options, think about looking into what other added benefits it may offer, such as a low minimum balance and no fees.

Here’s an example of why the difference in interest rates matters to you: If you put $10,000 into a high-yield savings account at a 2% APY and don’t touch it, you’ll have $10,201.84 after a year. You get that number thanks to adding compound interest (the 2% APY) to the principal (the original $10,000). But if your money earns only 0.01% in a traditional account, you’ll have $10,001 at the end of the year. You can see how this adds up. $10,000 at 2% grows by $201.84 at the end of year compared to just $1 at 0.01%. 3

What to look for in a high-interest savings account

When you’re looking for a high-interest savings account, it’s important to pay attention to the annual percentage yield (APY). The APY tells you how much interest your money will earn in a year. The more you earn, the better.

While the words "interest" and "yield" can sometimes be mixed up, there’s a difference. Yield is the return you make on an investment over a certain period of time, like a year. Interest is the amount of money you get paid for keeping your money in the bank. It’s like you’re lending money to the bank and the interest payment is what you get paid for doing that.

When looking for a high-yield savings account, try to find one with no fees. That way, none of your savings will be spent on bank fees. Once you deposit your money and keep it in the account, the interest alone will help your savings grow.

Also think about looking for an account that doesn’t have require a minimum balance. That way, you can start with whatever amount you have available. Some banks will reward you with a higher interest rate if you keep a higher balance in your account. For example, you might earn 1% for the first $1,000 and 1.25% if you keep more than a $1,000 balance in your account.

Now that you have a better idea of what to look for, let's dig a little deeper into some other considerations.

How to choose a high-interest savings account

When you're looking for a savings account, it's usually good to look for one with a high yield, no fees and no minimum balance requirements. Even a difference of 1 or 2 percent can add up, thanks to compound interest. It’s also a good idea to make sure the account is insured by the Federal Deposit Insurance Corporation—often called the FDIC. This means that the U.S. government protects your money from bank failure up to the allowable limits.

It also might be a good idea to look for a high-yield savings account that makes it easy to deposit money. Options such as remote deposit or a linked checking account can simplify the process. After all, the easier it is to make a deposit, the easier it’ll be for you to save.

High-interest savings account: How does it work?

A high-interest savings account usually works like any other savings account. You deposit your money in the bank and withdraw it whenever you want. Keep in mind though that savings accounts are usually limited to six “convenient” withdrawals per month on certain transfers and withdrawals.4

Are high-yield savings accounts safe?

A high-yield savings account can be a safe5 place to park your hard-earned cash. High-yield accounts usually share the same security as traditional accounts6. The FDIC insures the balance of bank savings accounts up to the allowable limits at FDIC-member banks. And the National Credit Union Share Insurance Fund provides coverage for savings accounts at credit unions.7

Are high yield savings accounts worth it?

High-yield savings accounts can also be a good way to save for retirement or build an emergency fund for dealing with unexpected expenses. High-yield accounts also pay more interest on the money you put in the bank than traditional savings accounts.

Do high-yield savings account interest rates change?

Yes, the interest rate a bank offers on a high-yield savings account can change. Each bank sets its own interest rates. The Federal Reserve’s benchmark interest rate can also change, and that sometimes impacts the interest rate banks offer on a high-yield savings account. That’s because the Fed Funds Rate is one of the things that banks use as a benchmark when determining their own rates.

In addition to changes to the Fed Funds Rate, interest rates sometimes change as the result of bank promotions. Sometimes a bank will offer a high rate for a limited period of time. But the rate decreases once the promotion is over. So, it’s important to compare both the promo rate and the standard rate when you look at the options offered by different banks.

How to make your savings grow faster

There are some common things you can do to help your savings grow faster:

  • Put your money into a high-interest savings account and leave it in there to earn interest.

  • Ask your employer to deposit a pre-determined amount from each paycheck into your savings account, usually called direct deposit.

  • Have money automatically sent on a recurring basis from one account (like your checking, for example) right into your savings account.

Sometimes we just need some inspiration to make important life decisions. Warren Buffet’s advice is to start investing in yourself. There’s no time like today to get started.

Ready to begin your savings journey?

Learn more about high-yield savings accounts.


This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

Citations

  1. 50 Warren Buffett Quotes on Investing, Life & Success (nd). Retrieved on August 22, 2019 from https://www.ruleoneinvesting.com/blog/how-to-invest/warren-buffett-quotes-on-investing-success/

  2. Handling High-Yield Savings Accounts (Aug. 11, 2019). Retrieved on August 22, 2019 from https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp

  3. Savings Interest Calculator (nd). Retrieved on August 22, 2019 from https://money.cnn.com/calculator/pf/moneygrow/index.html

  4. Savings Account Withdrawal Limits? Blame Regulation D (November 2, 2018). Retrieved on September 6, 2019 from https://www.nerdwallet.com/blog/banking/how-regulation-d-affects-your-savings-withdrawals/

  5. Handling High-Yield Savings Accounts (Aug. 11, 2019). Retrieved on August 22, 2019 from https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp

  6. Understanding Deposit Insurance (nd). Retrieved on August 22, 2019 from https://www.fdic.gov/deposit/deposits/

  7. How Your Accounts Are Federally Insured (nd). Retrieved on August 22, 2019 from https://www.ncua.gov/files/publications/guides-manuals/NCUAHowYourAcctInsured.pdf

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