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what is a high yield savings account

In a world where Americans are saving less and less, it helps to have something to motivate you to sock away some money for an emergency fund. A high-yield savings account can do that. As the name implies, these options pay you interest rates that rank well above those of traditional savings accounts. And the best savings accounts don’t require you to pay monthly fees or even keep a minimum balance. Some also provide very easy access to your funds via an ATM debit card. But what exactly is a high-yield savings account? Read on to learn all about these products and how they can help you improve your finances.

High-Yield Savings Accounts Defined

Simply put, high yield savings accounts are savings vehicles that earn much higher interest rates than those tied to their traditional counterparts. Even today, it’s not uncommon for a major bank to pay an interest rate as low as 0.01% on a savings account. High-yield savings accounts commonly collect interest rates in the range of 1% to 2.2%.

To put that into perspective, let’s say you deposit $10,000 into a savings account paying an interest rate of 0.01%. If the account compounds interest monthly, you would have earned $1 after one year. Everything else constant, a high-yield savings account that pays an interest rate of 1.00% would have earned you $135.82 in the same time frame.

And if you factor inflation, an interest rate of 0.01% can actually make you lose money in the long run. How? If inflation rises at a higher rate than the interest the bank is paying you, your money may be able to buy less when you take it out after a few years.

But beyond the larger return, high-yield savings accounts offer even more benefits.

What Are the Benefits of a High Yield Savings Account?

Some banks require you to make large deposits to open high-yield savings accounts. Moving forward, you also have to maintain large balances to avoid hefty fees, earn interest or even keep your account open.

But in the age of the internet, it’s easy to compare savings accounts to find the ones with the highest rates and the best terms. In fact, many online banks are offering the best rates and conditions on their savings accounts in order to compete with their brick-and-mortar counterparts.

For instance, some of the most popular online banks offer savings accounts with annual percentage yields (APYs) that climb above 1.00%. And they require very little in return. Several allow you to open one with any amount  you’d like. And from there, you don’t even need to keep a minimum balance or pay monthly service fees.

Some banks also link your savings accounts to debit cards. You can use these cards to make unlimited withdrawals at any ATM. Plus, many banks work with large ATM networks like AllPoint. This means you can access your money fee-free at thousands of ATMs across the country. In some cases, banks will even reimburse fees for using non-network ATMs.

Disadvantages of a High-Yield Savings Account

There’s something called Regulation D that you need to watch out for. This isn’t really a disadvantage on the part of the bank or the account. It’s just another pesky government regulation. In fact, it governs all savings and money market accounts.

This rule limits certain transactions and withdrawals to six per monthly statement cycle. The following transactions count toward those six.

  • Transfers to other accounts even with the same bank
  • Automatic transfers like those set to pay bills or fund another account periodically
  • ACH withdrawals
  • Point of Sale (POS) transactions made with a debit card
  • Transfers processed by phone
  • Transfers made via check or debit card

However, you can make unlimited withdrawals via ATMs and from tellers at physical branches.

Who Should Get a High-Yield Savings Account?

what is a high yield savings account

Anyone looking to open a rainy day fund that provides a higher-than-average interest rate and high liquidity should consider a high-yield savings account. However, the same can be said about the best money market accounts.

But if you’re comfortable with locking up your money for a set period of time in exchange for an even higher interest rate, definitely consider certificate of deposit (CD) accounts with the best CD rates.

Regardless of where you save, just make sure you’re saving into an account that offers the best return with little-to-no effort on your part.

What Is the Best High-Yield Savings Account?

We analyzed more than 120 savings accounts available today. Our research focused on interest rates, fees, liquidity and more. The result was a list of the top-five high-yield savings accounts. Below are the winners.

American Express Personal Savings

Most financial institutions that run physical branches offer dismal interest rates on their savings accounts. American Express is not one of them. Over the last year, the American Express Personal Savings account has offered APYs between 1.30% and 1.90%. These rates demolish the national average. Plus, Amex compounds interest daily and pays it monthly. The bank has no monthly fees or minimum balance requirements. And you can open an account with an amount of your choice.

Barclays Online Savings Account

The Online Savings Account from Barclays is very similar to its American Express counterpart, as its APYs over the last year have fallen somewhere between 1.15% and 1.90%. It also requires no monthly fees or minimum opening balance. However, you can manage it only online and over the phone. So it may be a better option for the more tech-savvy. But American Express also has a highly rated mobile banking app.

So it may just come down to preference. Both are solid options.

Synchrony High Yield Savings Account

Those who are willing to sacrifice a small crumb of their interest rate in exchange for superior liquidity may be interested in the Synchrony High Yield Savings Account. This online-only entity links the account with a debit card that you can use at ATMs to make unlimited withdrawals. On top of that, throughout the course of the last year, the account has still managed to earn high APYs in the range of 1.30% and 1.85%.

In addition, you can open one with just a penny and you don’t have to worry about monthly fees or minimum balances. Overall, it’s one of the best online high-yield savings accounts we’ve examined.

Ally Bank Online Savings Account

The Ally Bank Online Savings account is very similar to that of Synchrony. Over the last year, Ally has offered APYs in the neighborhood of 1.25% to 1.85%. The bank also charges no fees. However, Ally Bank offers a free checking account. This can make transferring funds much easier and automated.

Vio Bank High-Yield Online Savings Account

A new player in the game, Vio Bank emerged as the online entity of MidFirst Bank. And to beat the competition, it currently offers a High-Yield Online Savings Account with great APYs. In fact, the account has boasted an APY from 1.50% to 2.11% over the last year. These rates surpass not only every savings account on our list, but also most of the ones we’ve ever analyzed.

So why did it make the bottom of this list? Well, it’s a relatively new product. Its mobile banking app doesn’t even have any reviews on the Google Play store as of this writing. And ACH transfers also take about two or five business days to post. But if all you’re looking for is a superb interest rate on a savings account, Vio Bank is a solid new option.

Bottom Line

High-yield savings accounts can earn you an interest rate superior to that of a traditional savings account. And these days, it’s easy to shop around to find one with the best terms and rates. Online banks are a great place to start. Many allow you to open one with any amount. Some also charge no monthly fees and require no minimum balance for you to keep. All together, this makes it easy for you to keep all of your money growing along with the motivation to save more.

Tips for Finding the Best Savings Accounts

what is a high yield savings account

  • Surf the web to find the best savings accounts with the best rates and conditions that appeal to you. Banks are constantly competing for your service, so they aim to make better products. But with so many options to choose from, it can be a challenge. To narrow your search, we published a study on the best banks in the U.S.
  • Saving is crucial to financial wellness. But it’s a challenge for many, especially when you consider debt and retirement planning. If you’d like professional guidance, you can use our SmartAsset financial advisor matching tool. It provides you with information on up to three financial advisors in your area who can help. You can review their credentials and even set up interviews in case you decide to work with one.

Photo credit: ©iStock.com/anttohoho, ©iStock.com/andresr, ©iStock.com/andresr

Javier Simon, CEPF® Javier Simon is a banking, investing and retirement expert for SmartAsset. The personal finance writer's work has been featured in Investopedia, PLANADVISER and iGrad. Javier is a member of the Society for Advancing Business Editing and Writing. He has a degree in journalism from SUNY Plattsburgh. Javier is passionate about helping others beyond their personal finances. He has volunteered and raised funds for charities including Fight Cancer Together, Children's Miracle Network Hospitals and the National Center for Missing and Exploited Children.
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