How do high-yield savings accounts work?

Looking to make more money from savings account interest? High-yield savings accounts generally offer greater rates of return than typical savings accounts, helping to grow money faster with minimal effort.

This article looks at the potential pros and cons of high-yield savings accounts and what to consider before opening one.

What is a high-yield savings account?

High-yield savings accounts (HYSA) work similarly to regular savings accounts but generally offer higher interest on money deposited.

Banks compound interest over time, typically monthly, quarterly, or in the case of many high-yield accounts, daily. Providers of high-yield savings accounts will list the annual percentage yield (APY), which is based on the interest rate with compound interest factored in over a calendar year. In theory, the more frequent the compound period, the greater the return over time.

To give a good high-yield savings account definition, it's necessary to point out that APYs can be variable and tend to fluctuate. Terms and conditions for high-yield accounts, including fees and minimum requirements, also differ between providers. PayPal Savings¹, for example, doesn’t have fees or require a minimum balance.

Potential pros and cons of high-yield savings accounts

Some high-yield savings account benefits may include:

• Higher rates: A greater rate of return on savings can help money grow faster with minimal effort.
• Low risk: High-yield accounts provide a safe and stable place to store money.
• Accessibility: High-yield accounts typically provide easy access to funds.
• Security: Funds are typically insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits.

Some cons of high-yield savings accounts can include:

• Variable rates: Rates can fluctuate over time, so the initial rate advertised can go up or down.
• Fees: High-yield savings account fees may apply with some banks.
• Conditions: Some accounts may require a minimum balance or regular deposit to earn the rate or access certain features.
• Lower returns: Savings accounts in general offer lower returns if compared to riskier investments that may not offer guaranteed returns or FDIC insurance.
• Limitations: Many high-yield banks offer minimal features on their accounts. Certain withdrawals, such as by check, may not be allowed.

What to look for when choosing a high-yield savings account

Here's a checklist of factors to weigh when comparing different high-yield savings accounts:

• APY/Interest rate: Compare the rates offered by different institutions and look for the most attractive rate over time.
• Minimum balance requirements: Understand the terms and conditions around minimum balance. This may impact the rate or incur additional fees.
• Account fees: Look for accounts with minimal or no monthly maintenance fees.
• Accessibility: Consider if the account has features like an online app and mobile access for easy account management.
• Transfers: Some accounts can facilitate automatic transfers to help drive recurring savings.
• Add-ons: Look for any potential add-on features (e.g., financial goal-planning tools) to track savings progress.
• Importance of security features: Choose a reputable institution with FDIC insurance in order to protect deposits and safety protocols to secure account information.