What is a High-Yield Savings Account and How to Choose the Best One For You
Given today’s interest rates, taking the trouble to move your money can make a big difference, equivalent to about $500 a year for every $10,000 you have saved, according to Michael Finke, professor of wealth management at the American College of Financial Services. “If you’re not paying attention, you’re leaving a lot of money on the table,” he says.
Choosing the best savings account for your needs involves looking at more than just the advertised rate. You need to consider how you plan to use the account, how you prefer to bank and how much you plan to keep in savings.
What is a high-yield savings account?
The account most of us use on a day-to-day basis is a checking account. These financial workhorses are the best place to put money you plan to use for spending on everyday expenses, and the best checking accounts make it easy to perform transactions and cash-management activities like bill-paying and budgeting.
A savings account, on the other hand, is a place for money you don’t expect to spend at the moment but want to have accessible if the need arises. Many savings accounts limit the number of withdrawals you can make on a monthly basis, and may assess a fee if you go over that limit.
You can find great rates at high yield savings accounts offered by banks as well as credit unions.
While lots of banks like to market their products as “high-yield savings accounts,” the FDIC and other bank regulators don’t recognize these as distinct products from conventional savings accounts. “It’s certainly not an official term,” says Ryan Derousseau, financial advisor at United Financial Planning Group in Hauppauge, N.Y.
The upshot, according to Derousseau, is that the term means different things to different banks. You can find accounts labeled “high-yield” offering APYs that differ by a percentage point or more—a big reason it’s important to compare rates.
How to choose a high yield savings account
If you’re looking for the best high-yield savings account, it makes sense that you’d start with the interest rate—but don’t stop there. There are a few other important variables that distinguish high-yield savings accounts from one another.
For instance, if you want to bank with an institution that lets you walk in and ask somebody a question, trying to do all your money management via an app on your phone screen might be a frustrating experience.
Look for a good interest rate
The APY, or annual percentage yield, that you can earn from the most competitive online-savings accounts has climbed sharply over the past year or so. Today, you can find a handful of accounts in the 5% range, and there are dozens with APYs of 4% or higher.
The most competitive offers tend to come from online banks and credit unions. These institutions have lower overhead than traditional bricks-and-mortar banks, which allows them to offer higher rates. Banking experts also say it’s worth checking out smaller banks and credit unions that have regional rather than national footprints, because these institutions depend on consumer deposits more than their mega-bank brethren.
Market dynamics are also playing in savers’ favor, making it easier to find stand-out rates. Rising interest rates have forced banks to compete much harder for savers deposits, according to Joseph Mevorah, senior managing director at Empire Valuation Consultants. With so much attention focused on rates, as soon as one bank becomes the interest rate leader, competitors feel like they must match or beat the new top offer.
“It’s a self-fulfilling prophecy, so those institutions are forced to keep paying higher and higher rates,” Mevorah says. While the situation is a headache for bankers, “it’s fabulous for savers,” Mevorah says.
The best savings rates for June 2024
High-yield savings accounts have been providing some of the best returns on cash in years. The bounty won’t last forever, but with inflation still above the Federal Reserve’s 2% target, savers should have at least a few more months to enjoy generous interest rates.
A string of hotter than anticipated inflation readings to start the year has led to increased uncertainty about when the Fed could start cutting its benchmark federal-funds. When that happens, rates on savings accounts should decline as well. Wall Street observers now expect rate cuts to begin in September or later. Until recently, the prevailing idea was that cuts would begin early this summer.
Here are the best saving states we found in our June survey of the best savings account rates.
- Poppy Bank ($1,000 minimum to earn advertised APY): 5.5%
- EagleBank ($1,000 minimum to open): 5.38%
- Western Alliance Bank ($500 minimum to open): 5.36%
- Forbright Bank: 5.3%
- TAB Bank: 5.27%
These picks reflect the best available rates as aggregated by Deposit Accounts, which tracks roughly 275,000 rates at more than 11,000 banks and credit unions, and Buy Side from WSJ’s own research.
Look for convenience
While interest rates are important, you don’t want to look at APYs in a vacuum. Unlike fixed-rate products such as CDs, savings accounts interest rates are variable, so make sure you select a bank you’ll be happy with even if you’re earning a lower rate of return in the future.
A great rate can also become a lot less appealing if there’s a high hassle factor or you have to pay a lot of fees that eat into your earnings. If you plan to use a high-yield savings account to hold part (or all) of your emergency fund, then you should prioritize an account that will make it easy to get your hands on those dollars if you suddenly need them.
A key consideration is whether or not you’re comfortable with digital banking. Online banks and credit unions offer very competitive savings rates, but if you want an in-person experience, it will be more challenging—although not impossible—to find a high-yield savings account with a great rate.
Some banks advertise high savings APYs with strings attached. These can include having to maintain a high balance, or being charged monthly maintenance fees that can eat into the interest income you earn. And some savings accounts are tiered so that only part of your balance earns the top advertised rate.
In other words, you usually need to do more than blindly pick the rate at the top of an online list, says Derouseau. “You’re going to want to understand what’s required to get the rate that you’re seeing on-screen,” he adds.
Make sure it has FDIC insurance
The collapses of Silicon Valley Bank, Signature Bank and First Republic Bank in March 2023 highlighted how important it is to make sure that the bank you entrust with your savings is a member of the Federal Deposit Insurance Corp., the government agency tasked with protecting customer deposits if a bank fails.
FDIC deposit coverage is for up to $250,000 per bank, per depositor and per “ownership category,” which refers to different account types, including singly-held and joint accounts, certain trust accounts, corporate accounts and government accounts, as well as some types of benefit and retirement accounts.
The proliferation of online banks and nonbank fintechs that offer banking services can make it tough to determine your coverage. Some high-yield savings accounts are offered by online brands of brick-and-mortar banks, so it’s important to check the name of the “parent” institution.
For instance, if you have one individual high-yield savings account with a traditional bank and a second one with that bank’s online brand, your FDIC coverage limit would be inclusive of both accounts.
If you open a high yield savings account at a credit union, make sure it belongs to the National Credit Union Administration, the government agency that oversees credit unions and offers equivalent deposit protection to customers.
Typically, institutions display their membership in the FDIC or NCUA on their websites, but you can also check on the agencies’ respective websites to verify their participation.
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