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Are High-Yield Savings Accounts Even Worth It These Days?

Dayana Yochim  |  July 21, 2020

Even with a plunging Fed funds rate, high-yield online savings account interest rates crush the returns you’ll earn in a traditional savings account.

When high-yield online savings accounts came along, the appeal of standard savings accounts offered by brick-and-mortar banks came crumbling down. Traditional banks simply couldn’t compete with the competitive interest rates savers could earn at digital upstarts.

All this you may already know, but here’s a look at the basics. 

What is a high-yield savings account?

A high-yield savings account is a bank account that pays a higher rate of interest on your deposits than you’d get in a traditional savings account. We’re talking rates that were higher by a magnitude of 50 times or more, not that long ago.

High-yield accounts (aka high-interest online savings accounts) exist mostly online-only, which requires making some administrative adjustments, depending on how you want to use the account. They are best for money you don’t need to frequently access. Think emergency fund, near-term savings (for down payments, big purchases, tuition) and not long-term savings (anything over three or five years) or everyday spending money. 

How do high-yield savings accounts work?

A high-yield savings account works much like a traditional bank savings account. You deposit money and the bank pays you interest on the money you deposit. But the terms and logistics vary in three main ways:

High-yield savings accounts vs. traditional savings accounts

  1. They pay more in interest: The interest you earn is higher because high-yield savings accounts are offered mainly through internet-only banks, credit unions and the online banking arms of traditional banks. Because they don’t have to pay for physical branches, tellers, printed market materials and other worldly trappings, they can afford to pay customers higher rates.
  2. Withdrawals are limited: You’re allowed to take out money from the account when you need it — but only up to a point. Federal law dictates that high-yield savings account customers be allowed up to six no-fee withdrawals or transfers out a month. Many banks use that guideline as a maximum. (In April, the Fed lifted the six-per-month limit due to the coronavirus pandemic.)
  3. Transactions may require more steps: For example, if you want to deposit a physical check, there is no teller. You may be able to use an ATM if the online bank is part of a broader network. Or you may have to mail it in, use the bank’s app (to take a picture) or deposit the money first in a different linked account and transfer the money after it clears to your high-yield online savings account. 

Is it worth it when interest rates are so low?

Relatively speaking, yes. Even now, in a low interest rate environment, annual percentage yields (APYs) on high-yield savings accounts are 20 times or more than what regular savings accounts pay. 

The national average rate on savings is currently around 0.06%, according to the FDIC. Plenty of accounts pay even less than that. In comparison, we’re seeing high-yield online savings accounts that pay APYs of 1% and higher, even from the big banks like American Express, Marcus by Goldman Sachs and Ally. 

When rate shopping, compare APY, which takes into account how frequently interest is compounded.

We know that 1% is a far cry from the days of 2%-plus APYs on high-interest savings vehicles. But it’s certainly something — something that can pad your savings by hundreds of extra dollars.

Let’s math this: Vio Bank (a top pick in the high-yield savings category by Bankrate.com) recently advertised a 1.11% APY, requiring just a $100 minimum initial deposit. Keep a $5,000 balance in the account for five years, and you’ll earn $285 in interest, versus $15 in the traditional savings account at 0.06% APY. Add $100 a month to your savings, and you’ll rack up $455 in interest in the high-yield account versus $24 by keeping your money where it’s at.

Does the interest rate fluctuate? 

Yes. Interest rates on high-yield savings accounts can go up or down 1) based on changes in the Federal Reserve’s benchmark rates; 2) when a bank changes its rates, and 3) when a promotional rate expires. If you want to earn a guaranteed interest rate on your savings, a Certificate of Deposit (CD) is the way to go. 

Can you lose money in a high-interest account?

Your money is safe as long as the bank is a member of the Federal Deposit Insurance Corporation (FDIC) or, if it’s a credit union, the National Credit Union Association (NCUA). These regulators provide up to $250,000 of coverage per depositor, per institution and per ownership category (or account type). If you have a high-yield savings account in your own name, and a joint account at the same institution, your coverage is $500,000 ($250,000 for each account) and the other co-owner of the joint account is also covered up to $250,000. 

How do I pick the best high-yield savings account?

Here are six high-yield savings account features to compare:

  1. Interest rate: How much will your money earn if you park it at a particular bank? When rate shopping, compare APY (annual percentage yield), which takes into account how frequently interest is compounded (e.g. daily, monthly, etc.). Also note if you’re seeing a temporary promotional rate or simply the current going rate. Riding the wave of a promotional rate or getting a short-term bonus to nab extra dollars is a fine strategy. Just make sure you play by the rules so you don’t end up sacrificing the extra money you earned. 
  2. Minimum initial deposit: This is how much you need to open an account. If you’re trying to build your savings, start with an account that requires a low minimum, and add to it. Try not to dip below this amount or you might forfeit some of the interest you’ve earned or get hit with a low-balance fee. After you’ve amassed your savings fortune, you can transfer to another account or institution that offers better terms.
  3. Minimum balance requirement: Some banks require a minimum ongoing account balance to remain eligible for the advertised interest rate. You may also come across providers offering tiered interest rates: The higher the account balance, the higher the APY. Let that be an incentive to build your savings.
  4. Fees: Does the bank charge monthly service fees? Does it reimburse ATM fees? Read the fee schedule carefully. Steering clear of pesky fees is usually a matter of following the rules (and reading the fine print on updated terms sent to customers). 
  5. Accessibility: Think about how you’re going to use an account before you open it. Will you need access to cash — look at the bank’s ATM network, if it has one — or will electronic transfers do? Is the bank able to link your high-yield account to your other providers, or will you have to jump through a few hoops? 
  6. Deposit procedures: How do you get money into the account? Do you have to mail in checks? Is there a mobile app? Can you use an ATM? One workaround is to deposit checks into a linked account and electronically transfer funds into your high-yield savings account. If the idea is to build up a balance in your high-yield savings account, look for a provider that supports automated monthly or weekly transfers.  

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