How to Use a High-Yield Savings Account to Grow Your Money Faster
What if you could earn more money from a savings account without doing too much more than what you’re already doing?
That’s the real benefit of a high-yield savings account (HYSA).
As the name implies, a HYSA offers just that — an opportunity to earn a higher yield, meaning more money, on your balance than that offered by a traditional savings account.
The better earning potential makes HYSAs a great option for storing your emergency funds or savings for various short-term goals, like a new car, a future vacation, or a down payment on a home.
There are plenty of HYSAs out there to choose from, but not all are created equal. If you’re interested in opening one to help you meet your savings goals, then here’s what you should know.
HYSAs vs. Traditional savings accounts
High-yield savings accounts and traditional savings accounts are more similar than they are different — they’re both liquid, have no or low fees, and provide various deposit and withdrawal options.
As mentioned above, the main benefit of an HYSA is they offer higher rates. According to the Federal Deposit Insurance Corporation (FDIC), the average interest rate for a regular savings account is just 0.33% (as of 1/17/23). Many high-yield savings accounts, like those available through Raisin’s partner banks, currently offer rates up to 4.35% (as of 2/7/23)— over 13 times more than what traditional accounts are paying.
How much of a difference does this make? If you deposit $50,000 into a traditional savings account with a 0.33% APY, you’ll earn just $165 in total interest after one year.
But if you deposit that amount into a high-yield savings account with a 4.35% APY, your one-year interest soars to over $2,175.
The difference becomes even more pronounced over time due to the effect of compounding. After five years, the high-yield account would produce $11,868.45 in total interest, compared to only $831.84 from the traditional account when compounded daily.
What to look for in a high-yield savings account
Before selecting a high-yield savings account, you’ll want to make sure your account earns a competitive rate, is easy to access, and, of course, is secure.
Here are several details to consider:
One of the most important considerations is the interest rate, which determines how much you’ll earn from the account. An interest rate is essentially what the financial institution will pay you for keeping your money with them. You can usually find the rate stated clearly on the bank’s website or promotional materials.
Savings account rates are variable, meaning they may change at any time based on overall market conditions. For example, if the Federal Reserve reduces interest rates, then HYSA rates will likely decline as well. The reverse also is true.
Be sure to read the fine print regarding interest. Some institutions will require you to hold a minimum balance to receive the highest rate. Other banks might have you set up a checking account and have a monthly direct deposit to earn the best rate. However, other banks may offer the same great rate no matter what.
Interest compounding and APY
A key difference between high-yield savings accounts is how often interest compounds, in other words, how frequently it’s calculated. Banks can do this daily, monthly, quarterly, semiannually, or annually. The more often interest compounds, the more interest you’ll earn.
Many top banks offer HYSAs where interest compounds daily.
To incorporate compound interest, financial institutions will display a savings account’s annual percentage yield, or APY, which demonstrates interest rate plus the effect of how often interest compounds.
When comparing HYSAs, it’s best to use the APY instead of the interest rate, as the APY will give you a more accurate representation of how much you may earn over time.
Learn more about how APY and compound interest work to boost your savings here.
Fees and Requirements Terminology
Minimum opening deposit: Some financial institutions require you to make a specific initial deposit to open a high-yield account.
Minimum balance: HYSAs with minimum balance requirements may charge you a fee if your balance dips below the threshold. Luckily, there are plenty of banks without this requirement.
Fees: One of the key benefits of HYSAs is that they don’t typically come with fees. Be sure to verify this with your financial institution before signing up.
Unlike checking accounts, savings accounts aren’t meant for everyday expenses. Therefore, most savings accounts — both traditional and high-yield — limit withdrawals to six times per statement cycle, although they are no longer required to limit the withdrawals*.
To avoid being charged an excessive withdrawal fee (usually between $3 and $15), track how many withdrawals you make each month.
*Note that as of April 2020, the Federal Reserve Board announced a new regulation allowing financial institutions to lift the limit of only six withdrawals per month on all savings accounts. This announcement was introduced due to the Covid-19 pandemic to make it easier for customers to access their savings in a time of financial need. Learn more about this change here.
What good is having a savings account for emergency situations if you can’t easily access your money in an emergency? Before opening an account, find out how you can withdraw money and how long it takes to do so.
If you have a checking account, you may be able to link it to your HYSA for easy withdrawals. Some banks — typically those with brick-and-mortar locations — allow you to withdraw funds right from an ATM with your banking card.
There are typically several ways to deposit money into a high-yield savings account. You’ll want to confirm your preferred method is available before choosing a bank.
Most institutions allow you to make automatic or manual transfers online, directly from a checking or another savings account. Banks that have mobile apps may offer the option to make deposits directly from your phone, too. If you prefer to do things the old-fashioned way, find out if you can mail in checks to a designated address.
Whether you can deposit cash into an HYSA depends on your provider. Many HYSA are offered by online-only banks, so you may not be able to make cash deposits at a branch or ATM.
Federal Deposit insurance
Before opening any new bank or credit union account, verify that it is has federal deposit insurance through either the FDIC or NCUA, respectively. FDIC insurance and NCUA insurance offers government-backed protection on your money, up to $250,000 per depositor, even if the bank shuts down.
A way to save better
Raisin makes it easy to find high-yield savings accounts to fit your needs. Our partner banks and credit unions offer competitive rates with federal deposit insurance on all accounts.
Use Raisin to compare HYSAs easily and start saving today.
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