What makes a savings account "high yield"

A high yield savings account is a savings account where the bank pays you a higher interest rate than you would get at most traditional banks. The rate changes based on what the Federal Reserve does with its benchmark rate, so the APY you see today may be different in three months. Right now, high yield accounts typically pay between 4% and 5.35% APY, though this varies by bank and changes weekly.

The reason the rate is higher is straightforward: these accounts are usually offered by online banks that have lower overhead costs than brick-and-mortar branches. They pass some of that savings to you in the form of better rates. The tradeoff is that you cannot walk into a physical location, though most online banks let you transfer money in and out electronically without penalty.

High yield accounts are FDIC-insured up to $250,000 per depositor per bank, the same as any other savings account. The money is safe; the only real difference is how much interest the bank pays you.

Key Takeaways

  • High yield savings accounts at online banks currently pay between 4% and 5.35% APY, but rates change when the Federal Reserve adjusts its benchmark rate.
  • You should compare the actual APY being offered right now, not the rate from last month, because rates move frequently and vary between banks.
  • Most high yield accounts have no monthly fees, no minimum balance requirements, and no penalties for withdrawals, but you should confirm this before opening.
  • Your money is FDIC-insured up to $250,000, so the main difference between banks is the interest rate they pay and how straightforward they make it to move money in and out.

Where to find current rates and compare them

The best way to find a high yield account is to check the current rates directly on bank websites, because rates change frequently and comparison sites sometimes lag behind. Go to the savings account page of each bank you are considering and look for the APY listed next to the account name. Write down the rate and the date you checked it, because you will be comparing rates from the same day.

Banks that consistently offer competitive rates include Marcus by Goldman Sachs, American Express Personal Savings, Ally Bank, and Wealthfront. There are others, but these four are large enough that their rates are usually in the top tier. Smaller online banks sometimes offer slightly higher rates, but they may have slower customer service or fewer ways to move money in and out.

When you compare, look at the APY, not the interest rate. APY accounts for how often the bank compounds interest (pays interest on your interest), so it is the true number that tells you how much you will earn. A bank advertising a 5.30% rate might actually pay 5.35% APY if it compounds daily.

What to check before you open an account

Before you move money to a new bank, confirm three things: whether there is a monthly fee, whether there is a minimum balance requirement, and how long transfers take. Most high yield accounts charge no monthly fee and have no minimum balance, but some require you to keep $1,000 or $2,500 in the account at all times. If you fall below that, the rate drops or a fee kicks in.

Check how you can move money in and out. Some banks let you link your existing checking account and transfer money when ready. Others require you to initiate an ACH transfer, which takes one to three business days. A few still require you to mail a check or use a wire transfer, which is slower and sometimes costs money. If you think you will need to access the money quickly, pick a bank that offers when ready transfers or same-day ACH.

Read the account agreement for any restrictions on how many withdrawals you can make per month. Federal rules no longer cap this, but some banks still limit it in their own terms. If you plan to move money frequently, make sure the bank you choose does not penalize you for doing so.

How interest is calculated and when you receive it

Interest on a high yield savings account is calculated daily based on your balance. The bank takes your account balance at the end of each day, divides it by 365, multiplies it by the APY, and adds that amount to your account. This happens every single day, and the interest compounds — meaning the next day's calculation includes the interest you earned the day before.

Most banks deposit the interest into your account monthly, on the first or last day of the month. Some deposit it daily. The frequency does not change how much you earn over a year, but daily deposits mean you start earning interest on your interest sooner. If you have $10,000 in an account paying 5% APY, you will earn roughly $50 per month, whether the bank deposits it daily or all at once on the 30th.

The APY you see advertised is the rate the bank is paying right now. When the Federal Reserve raises or lowers its benchmark rate, banks adjust their savings rates within days or weeks. Your rate will go up or down automatically; you do not have to do anything. This is why a high yield account that pays 5.35% today might pay 4.80% in six months if the Fed cuts rates.

When a high yield account makes sense for your situation

A high yield savings account is useful if you have money you want to keep safe and accessible but do not need to spend right away. This includes an emergency fund, money you are saving for a down payment, or cash you are holding before you invest it. The interest you earn is real money — on $10,000 at 5% APY, you earn $500 per year, or about $42 per month.

It is less useful if you need the money within the next few weeks, because the interest you earn will be small. It is also not a replacement for a checking account; you should keep your everyday spending money in a checking account at a bank where you can deposit checks and withdraw cash at ATMs.

If you have more than $250,000 in savings, you should split it across multiple banks so that each bank holds no more than $250,000. This way, all your money stays FDIC-insured. You can open high yield accounts at different banks and move money between them as needed.

The difference between high yield and money market accounts

A money market account is similar to a high yield savings account but usually comes with a debit card and checkbook. The interest rate is often slightly lower, and there may be a higher minimum balance requirement. If you want to write checks against your savings, a money market account is an option. If you just want to park money and earn interest, a high yield savings account is simpler.

Certificates of Deposit (CDs) are another option. You lock your money away for a set period — three months, six months, one year, or longer — and the bank pays you a fixed rate. If you withdraw the money early, you pay a penalty. CDs currently pay slightly higher rates than high yield savings accounts, but you lose the ability to access your money without a cost. Use a CD only if you are certain you will not need the money for the full term.

How to move money into your new account

Once you have chosen a bank and opened an account, you need to move money from your current bank to the new one. The easiest way is to link your existing checking account to the new savings account and initiate an ACH transfer. This is free and takes one to three business days. You can transfer as much as you want; there is no limit.

Some banks let you set up automatic transfers on a schedule — for example, $500 every Friday. This is useful if you want to build your savings gradually without having to remember to transfer money each time. You can change or cancel the automatic transfer anytime.

If you want to move money faster, some banks offer same-day ACH or when ready transfers. These usually cost nothing if you are transferring from another bank account you own. Wire transfers are faster but usually cost $15 to $25 and should only be used if you need the money the same day.

Frequently Asked Questions

Can the bank lower my interest rate without warning?

Yes. Banks can change the APY on a high yield savings account anytime, and they usually do when the Federal Reserve changes its benchmark rate. You will not lose money — the rate just goes down for future interest. If you are unhappy with the new rate, you can move your money to a different bank.

What happens if the bank fails?

Your money is protected up to $250,000 by FDIC insurance. If the bank fails, the FDIC will transfer your account to another bank or send you a check for the full amount. This has happened only a handful of times in recent history, and depositors have always been made whole.

Is there a penalty for closing the account?

Most high yield savings accounts have no early closure penalty. You can open an account, move money in, and close it whenever you want without paying anything. Check the account agreement to be sure, but this is standard across most online banks.

Can I use a high yield account as my main checking account?

Not really. High yield savings accounts do not come with debit cards or check-writing ability, and transfers take one to three days. You need a checking account for everyday spending. Use a high yield account only for money you do not plan to spend soon.

How much money should I keep in a high yield account?

That depends on your situation. A common guideline is to keep three to six months of living expenses in a high yield savings account as an emergency fund. Beyond that, you might keep money you are saving for a specific goal, like a house down payment or a car. The rest of your money can go into investments if you do not need it for several years.