High-Yield Savings Accounts: What They Are and How They Work

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If you’re anything like the vast majority of Americans—78% of whom have a savings account—you likely try to save some of your expendable income for financial emergencies, an upcoming vacation, or a major purchase.

But if you’re only using the traditional savings account available from your traditional bank, you might not be optimizing your potential for interest earnings. Enter the high-yield savings account.

So, how do high yield savings accounts work? A high-yield savings account is an account type that can pay a substantially higher interest rate than traditional savings options. But if you’re considering whether this account type is right for you, you’ll want to dive in much deeper—from how a high-yield savings account could fit into your financial plan to the drawbacks and benefits you should expect.

What Is a High-Yield Savings Account?

A high yield account typically pays 20–25 times more than the national average for traditional savings accounts. But there are a few other crucial elements that distinguish a high-yield savings account from a traditional savings account:

  • High-yield savings accounts typically feature a low or no monthly fee.
  • They don’t often require high minimum deposits.
  • They’re typically offered by online-only banks or financial institutions with a limited brick-and-mortar presence.

The last point above is one of the primary reasons why high-yield savings account providers can offer such high interest rates. Providers are typically smaller financial institutions with reduced (or no) brick-and-mortar facilities to maintain, reducing their overhead costs and allowing for higher interest payments to customers. 

How Does a High-Yield Savings Account Fit Into Your Financial Plan?

Whether you’re satisfied with your current savings options or are seeking some new alternative banking options, you might wonder how you would use a high-yield savings account. You could establish the account for a variety of reasons:

  • To build an emergency fund for unexpected costs, like home repairs, veterinarian or medical bills, or major car repairs
  • To add a low-risk investment to your portfolio
  • To save for a major purchase, like a vacation, home, new or used car, wedding, or home renovation

When determining how much to put in a high yield savings account, consider your financial priorities. If saving for retirement is at the top of your money management to-do list right now, then depositing your disposable income into retirement savings products like a 401k, IRA, or high-yield savings account, could be advantageous in the long-term.

Are High Yield Savings Accounts Worth It?

If the concept sounds too good to be true, you might be right—there are some possible drawbacks to consider. 

In the technical age, many of these minor inconveniences are easy to overcome. That said, it’s still important to consider every facet before moving your money.

You Might Have to Venture Away from Your Primary Financial Service Provider

If you’re interested in opening a high interest savings account, you’ll likely have to venture outside your primary financial institution’s offerings. This may be true for the following reasons:

  • If you manage most of your money with a traditional bank—operating checking, savings, credit, or loan accounts, for instance—this provider may not offer a high-yield savings account product. 
  • Traditional banks offer numerous products like a loan, checking account, retirement account, and more. These products require substantial staff to manage, increasing conventional banks’ operating costs and decreasing their ability to provide high Annual Percentage Yield (APY) to savings account holders. 
  • Since online or small financial service providers have lower operating costs, they’re often more equipped to provide higher interest dividends to savings account customers. 

Due to the nature of the financial services industry, you might have to become a member of a second servicer when you’re ready to open a high-yield savings account. While this isn’t the end of the world, it can add an inconvenience factor for some. 

Many High-Yield Savings Account Providers Don’t Offer Other Products

Most financial services providers offering high-yield savings accounts likely don’t offer many other money management products (if any). This is often because:

  • They want to keep costs down – Low operating costs allow high yield account providers to offer a higher APY. Money a provider isn’t spending on overhead, and other costs can be distributed among savings account holders. 
  • They only operate online – Many traditional banking operations require brick-and-mortar facilities, which typical high-yield savings account providers don’t usually have. For instance, you likely won’t be able to manage physical check deposits or safe direct deposit boxes with your high-yield savings account provider. 

High-yield savings account providers are rarely a one-stop shop. But there are rare, convenient exceptions, like Aspiration, where you can manage your checking account, high-yield savings, and investment accounts with one provider. 

You May Need to Use Online-Only Services

Depending on your comfort level with digital technologies, you might not currently use any online banking services. While it’s becoming less common, it’s still possible to only use a bank’s physical services (e.g., in-person deposits, paper statements, ATM, or drive-thru withdrawals) without opting into any online or virtual banking tools.

But since many high-yield savings account providers are online only, account holders often must make deposits and withdrawals using digital tools, like:

  • Online bank transfers using account and routing numbers to move funds digitally
  • Mobile check deposits using a smartphone camera

For instance, if you received cash as a gift and wanted to deposit it into your online-only high-yield savings account, you may have to:

  1. Deposit the cash at a brick-and-mortar financial institution.
  2. Move the money from your brick-and-mortar account to the online savings account via:
    • Electronic Funds Transfer (EFT)
    • A check written to yourself and deposited digitally to the online account.

Benefits That Outweigh Potential Inconveniences

For people who grew up in the digital age or who have quickly become accustomed to the changing face of technology, the drawbacks above might not outweigh the substantial benefits of a high-yield savings account—which we’ll discuss in more detail below. So, why should you get a high-yield savings account?

#1 Significantly Higher Interest Rates

High-yield savings accounts’ primary selling points are their high interest payments to account holders. That said, what is a good APY for high yield savings accounts?

As of May 2022, the Federal Deposit Insurance Corporation (FDIC) determined that the national average interest rate for traditional banks’ savings accounts was 0.07%. So, if you deposited $1,000 into your savings account and maintained that balance for a year, you’d only be paid $0.70 in interest, on average.

Generally speaking, any high-yield savings account provider offering a rate higher than the national average will help account holders accomplish their primary task—earning more interest than they would with a traditional savings account. 

For instance, an Aspiration Spend & Save Account holder can earn between 3.00-5.00% on their savings account balance per billing cycle. 

#2 More Freedom Than Other Investments

Investment products and savings accounts are both financial products that can help you reach your savings goals, but they each have their own benefits and drawbacks:

  • Investment accounts like IRAs, 401ks and CDs give savers a chance to customize their financial risk. However, early withdrawals in the event of a financial emergency or early retirement can incur significant tax liabilities, fees, or both. 
  • Traditional savings accounts are low-risk investments, but they generally have significantly lower returns than the investment products listed above. All savings accounts are subject to federal regulations that limit customers to six free funds transfers per month. 

A high-yield savings account combines the best of both of these products. With the higher returns of investment products and the decreased risk of savings accounts, you can obtain a savings option that gives you as much freedom as possible while managing your money. 

#3 Low Risk

High-yield savings accounts can offer significant returns without the high risk savers can encounter on the stock, bonds, or precious metal markets. But what makes a high-yield savings account a low-risk investment?

There are several factors at play:

  • With high-yield accounts, financial institutions aren’t using your savings deposits to invest in risky stocks. Instead, they’re lending it to creditworthy businesses and individuals who are very likely to pay the loan back.
  • Just like traditional savings accounts, high-yield savings accounts are protected by the FDIC and NCUA (the FDIC for credit unions). 

Low-risk investments are particularly important for people who will retire within the next ten years or who have already retired. Finding a low-risk, high-reward investment solution can help to protect their current funds and increase the likelihood of profitable returns. 

What to Look For in a High-Yield Savings Account

If you’re ready to take the plunge and sign up for a high-yield savings account, you may still have questions to answer. For example, how much is a high yield savings account? Which one is the best? And how can you narrow your choices?

First, you’ll need to know where you can find a high-yield savings account provider. When looking for a product, consider the following sources:

Next, compile a list of high-yield savings products from FDIC-backed financial institutions. Take note of their:

  • APY rates
  • APY policy, including details like dividend disbursement frequency, rate changes for higher balances, and variable APY policies
  • Minimum initial direct deposit required to open a bank account
  • Minimum balance required to keep the bank account open
  • Fee for signup, administration, and funds transfers
  • Methods they offer for access, such as mobile app, desktop browser site, in-person services, mobile deposit, and ATM access

Once you have listed all these factors, it will be easier to compare, contrast, and choose the one that’s right for you.

Spend, Save, and Invest with Aspiration

A high-yield savings account is an excellent option for people seeking a low-risk and high-reward investment. While they’re typically only available from online banks, their benefits can significantly outweigh their drawbacks—especially in terms of their higher APY. 

If you’re looking for an all-in-one money management solution, consider managing your money with Aspiration’s eco-friendly debit card. We offer a combined cash management and high-yield savings account that provides APYs that are many times the national average—and you can earn even more when you sign up for Aspiration Plus. 

Aspiration is the financial services provider promising to equally prioritize your financial health and the planet. We can’t wait to see how our services empower you to use your wallet for good. 

Sources: 

The Motley Fool. Study: Average American’s Savings Account Balance is $4,500. https://www.fool.com/the-ascent/research/average-savings-account-balance/ 

Investopedia. What Is A High-Yield Savings Account?. https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp 

Forbes. What Is a High-Yield Savings Account?. https://www.forbes.com/advisor/banking/savings/what-is-a-high-yield-savings-account/

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