high-yield savings

High-Yield Savings Account

A high-yield savings account is a type of deposit account that pays a significantly higher interest rate than a standard savings account. These accounts are typically offered by online banks, credit unions, and some traditional banks. The interest rate is expressed as an annual percentage yield, or APY, which reflects how much your balance will grow over one year when interest compounds.

High-yield savings accounts generally work the same way as regular savings accounts. Your deposits are held securely, and in most cases they are insured by the FDIC (for banks) or the NCUA (for credit unions) up to $250,000 per depositor. The key difference is the rate of return. While a typical traditional savings account may offer 0.01% to 0.10% APY, a high-yield account commonly offers rates that are ten to twenty times higher, depending on current market conditions.

Interest rates on these accounts are variable, meaning the bank can raise or lower them at any time. They typically move in step with the federal funds rate set by the Federal Reserve. When interest rates rise nationally, high-yield savings rates tend to rise as well, and the reverse is also true.

Why it matters

Keeping your savings in a high-yield account rather than a standard account means your money grows faster with no additional risk or effort on your part. For short-term savings goals, like an emergency fund or a planned purchase, the difference in earned interest can be meaningful over time. A high-yield savings account is generally considered a low-risk place to park cash you may need access to relatively soon.

Example

Suppose you deposit $10,000 into a standard savings account earning 0.05% APY. After one year, you would earn approximately $5 in interest. If you instead deposit that same $10,000 into a high-yield savings account earning 4.50% APY, you would earn approximately $450 in interest over that same year. Both accounts hold your money safely, but the high-yield account puts significantly more money back in your pocket.

Related terms

• Annual Percentage Yield (APY)
• Federal Deposit Insurance Corporation (FDIC)
• Money Market Account
• Certificate of Deposit (CD)
• Federal Funds Rate