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Key takeaways
- A high-yield savings account offers a much higher interest rate than a standard savings account.
- A higher interest rate lets you grow your savings faster.
- High-yield savings accounts are considered a safe, secure way to save for short-term goals.
A high-yield savings account, or HYSA, is a type of savings account that pays a significantly higher interest rate than a traditional savings account. A HYSA can be a powerful tool to make your money work harder and grow your savings more efficiently.
Before opening a new high-yield savings account, you need to understand how they work, the standard features of this type of account, and the pros and cons of opening a high-yield savings account.
What is a high-yield savings account?
Standard savings accounts and some checking accounts offer modest interest rates. A high-yield savings account has much higher rates so you can earn more on your savings.
The current national average interest rate for a standard savings account is 0.39%. With a HYSA, you can earn a much higher interest rate – up to 5% in some cases. Over time, your funds will earn more interest and your savings will grow faster.
Who should use a high-yield savings account?
A high-yield savings account can be valuable for almost everyone with savings. It’s a risk-free way to earn interest on your savings. HYSAs are particularly useful if you’re:
- Building or maintaining an emergency fund: It’s a best practice to store away enough money to cover three to six months’ worth of essential expenses. A high-yield savings account helps your money grow while keeping it available when you need it.
- Earn an irregular or unpredictable income: If you’re a freelancer, seasonal worker, or other worker with an irregular income, a high-yield savings account is a smart place to park your money. You can stash away savings during high-income months but still access your money if work slows down.
- Saving for a specific short-term goal: Whether you’re saving for a wedding, vacation, new car, or other short-term goal, a high-yield savings account can help. It offers better returns than a traditional savings account without the risk of investing.
- Risk-averse and look for a better interest rate: Unlike with investing, you don’t risk losing money when you deposit it into a HYSA. Your savings will earn interest while being FDIC-insured for up to $250,000.
For many people, the answer to, “Is a high-yield savings account worth it?” is yes. It’s an easy way to earn interest while keeping your savings safe and accessible.
How does a high-yield savings account work?
High-yield savings accounts are typically offered by financial institutions or financial tech companies that offer online banking services. Many have FDIC insurance that protects your money for up to $250,000 in case of bank failure.
Here’s a closer look at how HYSAs work.
APY
HYSAs have higher interest rates than traditional savings accounts, and Chime currently offers up to 3.50% APY1 for savings accounts. The annual percentage yield (APY) on a savings account represents the total interest earned over a year, expressed as a percentage of your initial balance.
Here’s an example of how a HYSA with a 3.50% APY that compounds annually would grow over a five-year period.
| Time | Account Balance |
|---|---|
| Initial deposit | $5,000 |
| After one year | $5,175 |
| After two years | $5,356.13 |
| After three years | $5,543.59 |
| After four years | $5,737.62 |
| After five years | $5,938.43 |
This example doesn’t include any additional deposits beyond the initial one. In five years, your $5,000 can earn you almost a thousand more dollars just by being in a high-yield savings account with 3.50% APY. Learn how much you should save each month to help your money grow even faster.
Note that the interest earned on a HYSA is subject to federal income taxes.
Compound interest
With compound interest, you earn interest not only on your initial deposit but also on the interest that accumulates over time. This results in a higher return on your money than simple interest, where you only earn interest on your initial deposit.
Interest may compound daily, monthly, or annually. The faster it compounds, the more your savings will grow. That means daily interest will earn you more than monthly or annual interest.
At the end of each compounding period, the interest earned is added to your balance, increasing the amount on which future interest calculations are based.
Withdrawals and transfers
HYSAs usually offer easy access to your savings via withdrawals and transfers to another account. Some banks limit withdrawals to six per month, though many institutions no longer enforce this rule.
If you have both a checking account and high-yield savings account at the same bank, you can often instantly transfer money back and forth between accounts. This lets you easily grow your savings while also giving you the option of taking money back out when you need it.
Why open a high-yield savings account?
A high-yield savings account can be a safe place to store your cash and earn interest on your balance. Here’s a look at the benefits and drawbacks of a HYSA so you can decide if it’s right for you.
Pros of a high-yield savings account
- Higher interest rates: HYSAs typically have much higher APYs than traditional savings accounts, so your money will grow faster. And because you’re earning more interest, your balance will compound more quickly over time.
- Safe and secure: HYSAs are usually insured for up to $250,000 by the FDIC (at banks) or NCUA (at credit unions).
- Low-risk investment opportunity: Unlike with stocks or bonds, you can’t lose money in a HYSA.
Cons of a high-yield savings account
- Potential withdrawal limits: Some HYSAs have limits on withdrawals, so your money may not be as accessible as it could be.
- More requirements: Some accounts require minimum balances or specific steps to earn the highest APY.
- Not ideal for long-term wealth building: High-yield savings accounts aren’t ideal for long-term wealth building due to the relatively lower interest rates compared to long-term investments.
A high-yield savings account is a safe, low-risk way to grow cash for short- or medium-term goals. You won’t lose your money if the market swings down, and your balance will be insured by the FDIC or NCUA. If your goal is wealth building or saving for retirement, though, it’s not a replacement for long-term investing.
6 things to look for in a high-yield savings account
Now that you have an answer to, “What are high-yield savings accounts?” you may be wondering how to compare offers. Here are six features to look for when picking a HYSA.
1. Interest rate
The interest rate is one of the most important features to consider when choosing a high-yield savings account. The higher your rate, the more interest your savings will earn over time.
An account’s APY reflects both the interest rate and how often interest compounds. By looking at the stated APY, you can compare different HYSAs on an apples-to-apples basis.
That said, APYs are variable and can go up or down over time. Look for an account with a consistently high APY that won’t sink down after a short-term promotional period.
2. Initial deposit requirements
Some banks require a minimum initial deposit to open a high-yield savings account, while others do not – and the required deposit could be more than you initially have.
Choose an account that fits your budget and doesn’t put pressure on your finances. If you’re just building your savings, look for accounts with a lower initial deposit requirement.
3. Minimum balance requirements
In addition to the initial deposit, some high-yield savings accounts have minimum balance requirements to avoid fees or to get a higher APY. Be aware of these requirements, and choose an account that will allow you to easily maintain the minimum balance.
4. Compounding method
The compounding method refers to how often interest is added to your savings balance. Many HYSAs compound interest daily or monthly.
The more often interest compounds, the higher your return on investment. That’s why a daily compounding method is more lucrative than a monthly or annual one.
5. Fees
Some banks charge a monthly maintenance fee for their high-yield savings accounts. However, the fee is often waivable if you maintain a certain balance or deposit a minimum amount per month.
Other common bank fees include excessive transaction and wire transfer fees. Look for an account with minimal fees and review the requirements for avoiding them.
6. Withdrawal limits
High-yield savings accounts may limit the number of withdrawals and transfers you can make each month to encourage saving. For example, some institutions may have a monthly limit of six withdrawals and impose a penalty for any additional withdrawals.
You may also be limited to the amount of money you can withdraw or transfer at a time. Check the terms of the HYSA you’re considering so you know what to expect.
How to open a high-yield savings account
Once you’ve chosen a bank, the process of opening a high-yield savings account is straightforward. Gather the following documentation:
- Social Security number.
- Photo identification (like your driver’s license or passport).
- Personal information (like your address, phone number, and email).
Next, fill out and submit the application form. If the bank requires a minimum deposit to open a HYSA, arrange a transfer from your checking account or another funding source to complete the account opening process.
Chime tip: Consider setting up automatic deposits to your high-yield savings account to help your savings grow on autopilot.*
Grow your savings faster with a high-yield savings account
A high-yield savings account has many financial benefits and few drawbacks. It’s the ideal account for your emergency savings or to save money for a down payment on a house or car.
If your current savings account isn’t earning much money, check out the current rates for some high-yield savings accounts. Learn how to grow your money faster with a Chime high-yield savings account.
Frequently asked questions
Do I pay taxes on a high-yield savings account?
The interest earned on a high-yield savings account is considered taxable income and is taxed at your regular rate. At the end of the year, your bank will send you a Form 1099-INT, which shows the amount of interest you earned during the year. You’ll report this income to the IRS when you file your taxes.
Are high-yield savings accounts safe?
High-yield savings accounts are generally considered safe. Most reputable financial institutions offering these accounts are insured by the FDIC or NCUA, protecting deposits up to the maximum allowable limit. This insurance safeguards your funds in the event of a bank failure or financial downturn.
Do high-yield savings account rates change?
High-yield savings account rates are variable and can change at any time. If the rate increases, so will your earnings. If it decreases, you’ll earn less on your savings. Use a savings goal calculator to determine your savings based on current interest rates.
Can you withdraw money from a high-yield savings account?
Yes, you can withdraw money from a high-yield savings account. However, these accounts often limit the number of withdrawals allowed per month to encourage saving. Exceeding the monthly withdrawal limit may result in fees or other penalties.
Can you lose money in a high-yield savings account?
High-yield savings accounts are typically low-risk, meaning your initial deposit is generally safe and secure. However, while your savings will grow over time with interest, the returns may not always keep pace with inflation. The purchasing power of your savings may be affected, potentially resulting in a loss of real value.