What is a High-Yield Savings Account?
If you thought a high-yield savings account was, well, just another way of saying “savings account,” then you’re not alone. However, just as we live in a world that is varied and complicated, banking and savings accounts are quite the same.
In this Wealth Rocket article, we will answer the common question: “What is a high yield savings account?” In an effort to give this unique type of banking tool the differentiation it deserves, we will also break down some common misconceptions about this particular type of account and provide some high-level guidance regarding whether or not a high yield savings account is the right choice for you and your money.
What is a High-Yield Savings Account?
Chances are, if you have a bank account, you’re already familiar with traditional savings accounts.
With this type of account, you set aside some of your money in a savings account instead of a checking account. The bank then allows you to accrue interest and earn money on your money.
However, the amount of interest in savings accounts payout is usually very low. Although there are exceptions, the average savings accounts offer a 0.05% interest rate somewhere around the ballpark.
Although it is theoretically possible to make money from this, it is no surprise that many bank patrons seek out a little bit more from their interest rate, particularly if they possess a rather modest amount of savings. That’s where high-yield savings accounts come into play.
In short, a high yield savings account offers compound interest rates that are up to 25 times higher than the national average traditional savings account can offer.
High yield savings accounts are usually not found through your regular bank and are often instead exclusively offered through online banks that each have their specific qualifying requirements.
In the next section, we will offer a deeper overview of why high yield savings accounts can offer such high rates on interest, as well as what you should consider while shopping around for a high yield savings account.
How to Choose a High Yield Savings Account
Sold on the idea of your hard-earned money earning interest while you sleep? You may be eager about the idea of getting started as soon as possible. Not so fast, though! There are certain things that you should first consider before opening an account.
Even after considering this, it is not unusual for high-yield savings accounts to come with an interest rate that is 20 or 25 times higher than that of the bank average to be available.
As mentioned earlier, this could translate to a rate anywhere between 1.00% and 2.00% of an Annual Percentage Yield (APY), which could offer profitable returns, even on balances relatively low balances.
However, some high yield savings accounts indeed have minimum balance requirements.
While this may rule out the accessibility of certain accounts, there are certainly options out there that will let you get started with a deposit of only $100. It’s always a good idea to shop around between different online banks before finding the one that works best for your particular financial situation.
So, there you have it — another way to get into the habit of your bank account earning money for you. Once you get started, it’s not to not be stuck on the mindset of finding ways to have your money earn passive income for you.
The first is the amount of interest that you can make may be dependent on current events. In fact, with a high yield savings account, your interest rate is never guaranteed (or “fixed”) because the number fluctuates based on a government entity.
In the United States, this is the status of the federal reserve. In Canada, the equivalent to this is the Bank of Canada. No matter the institution, the reasoning is the same: banks adjust their savings rates when the federal funds rate changes.
Frequently Asked Questions
A high yield savings account is a type of savings account that offers an interest rate that is up to 25 times higher than that of a traditional savings account. They are often exclusively offered through online banks.
A high yield savings account works by awarding you an Annual Percentage Yield (APY) that is much higher than average, meaning you will earn at least 1.00% of however much money you have invested in a high yield savings account.
For example, if you have invested $5,000, you will earn $100 over a year in a high yield savings account with a 2.00% interest rate.
When choosing a high yield savings account, you will want to consider how much money you want to invest and whether or not an account has a minimum deposit requirement, whether or not you want unlimited access and withdrawals to your money, and what your target interest rate is.