Are you getting a competitive interest rate from your current high-yield savings account?
Not all savings accounts are created equal, and some were simply meant to squeeze out as much interest as possible. Find out the benefits of a high-yield savings account and how you can benefit from compounding interest.
Our top pick: American Express® Personal Savings High Yield Savings Account
Compare high-interest savings accounts
What is a high-interest savings account?
A high-interest savings account, also referred to a high-yield savings account, offers a competitive interest rate for money you keep in your account designed to help you save more money. Typically, these accounts pay compound interest that’s typically calculated daily and paid out monthly. And because many are also online savings accounts not connected to physical bank branches, they come with a free, 24/7 online banking platform to access your funds.
How is interest taxed on my savings account?
Benefits of a high-yield savings account
- You don’t need to know anything about finance.
Compared to other accounts like IRAs and brokerage accounts, a savings account is probably the easiest one to apply for. You can always reinvest what you’ve deposited there into another asset, and it’s almost impossible to get a negative return on a savings account.
- You don’t need to take any risks.
Savings accounts are considered one of the safest investments in the financial system, next to a certificate of deposit. Most banks and financial institutions are guaranteed by the FDIC, which means that eligible deposits are insured up to $250,000 per person, per bank. If you have more than $250,000, try to diversify your funds across different banks to cover all your investments.
- You’re buying time to learn.
A savings account is a stepping stone to learn how to earn greater returns by investing in stocks and other investments — you can leave the money there until you’re comfortable enough to take on more complex financial products.
- You can see results fairly quickly.
With the right account, you may begin to see your assets start to grow in as little as a few months.
How do high-interest savings accounts work?
You generally link a high-yield savings account to your checking account so you can easily make transfers between accounts. In some cases, you can only link your savings account to another account within the same bank, but this isn’t always true. Besides convenient transfers, some account providers even offer ATM access to your savings.
The interest rate is calculated on your balance daily, monthly or quarterly, while your interest is paid monthly, quarterly or annually. The following is the formula your bank would use to calculate your daily interest:
Find the best high-yield savings account
- Look for: High and competitive interest rates
Make sure you know how much of your savings is earning the advertised interest rate. Some banks pay as much as 5% interest, but only the first $1,000 of your money. Other banks only pay a high rate on large account balances, like $100,000. Also, pay attention to the conditions required to earn the interest rate. The offer may only apply to new customers or you may need to meet deposit and withdrawal conditions.
- Look for: 24/7 accessibility
There are usually several ways to conveniently access your savings, including mobile, online and phone banking. Some savings accounts even come with ATM cards. However, if you’re trying to stop yourself from dipping into your savings, consider an account with limited or no accessibility. Certificates of deposit (CDs) offer a higher rate of interest the longer you agree to keep your money inside. The catch is that you won’t have access to your savings for the duration of the term unless you want to pay a hefty penalty.
- Look for: Whether you can link your existing bank account or need to open another account.
Depending on your bank, you may be required to link your high-interest savings accounts to a checking account in the same bank. If you have a checking account at a different bank, find out if you can link it to your high-yield savings account. Otherwise, you may be forced to pay another monthly fee for a bank account you might not need.
- Look for: Zero fees
Check for fees for maintaining the account, though it’s common for savings accounts to have no monthly fees.
See our list of the best high-interest savings accounts
Types of high-yield savings accounts
Find out if you’d be better off with a business account, joint account or children’s savings account.
If you’re self-employed or a business owner, you may be better off with a business account. These accounts allow you to separate your work and personal expenses so it’s easier to organize your expenses at tax time.
If you’re sharing finances, a joint account may be easier. This kind of account require two signatures to make withdrawals. This can help partners and couples reach a savings goal together. Read more about joint accounts here.
Children’s savings account
If you want to teach your children good money habits, you can set up a children’s savings account. Most banks offer competitive deals for children’s savings accounts, which may include no fees. Online accounts tend to pay a higher interest rate and charge fewer fees, catering to savers gradually growing their balance over time.
Advantages and disadvantages
Things to consider before deciding on a savings account.
- You can reach your savings goals quicker. If you apply for a high-yield savings account that matches your savings style, you can get a head start on reaching your financial goals.
- They usually charge few or no fees. The majority of high-interest savings accounts don’t charge any fees for maintaining the account.
- Low balances can earn a lower rate. Some accounts work on a tiered interest rate structure, which means that the more you have in your account, the higher the standard variable rate.
- Transfer times can take up to three business days. The limited access could prove troublesome if you suddenly need the money for an important purchase. Transfers could take up to three business days and you’ll be limited to six convenient withdrawals per month.
The difference between a savings account and CD
High-yield savings accounts offer competitive rates, but conditions apply in most cases. For example, you might need to deposit a certain amount every month and not make any withdrawals, or you may need to keep your balance above a certain amount. For more information on regular savings accounts, see our savings guide.
Certificates of deposit offer good interest rates over a fixed term between one month and five years. However, there’s usually a minimum deposit required. And although money in CDs can be withdrawn before maturity, you’ll likely pay a hefty penalty.
How to apply for a high-interest savings account
What do I need to apply for a high-yield savings account online?
Once you’ve clicked through to the bank’s secure application page, you will typically need to provide:
- Your personal details
- Your Social Security number and related information
- Details of an account you want to link to your new high-interest savings account
Can I open a high-yield savings account as a tourist?
Depending on your visa type, length of stay and other details, you may be able to open a bank account in the US if you’re a tourist. You can learn more about how to open a bank account in the US here. You should always compare different migration programs offered by certain lenders. Speak with the financial institution directly about eligibility requirements for opening an account as a temporary visitor.