What Is a High-Yield Savings Account?
Saving accounts seem pretty simple – add money, earn interest, add more money, and make withdrawals as needed.
But if you’re dropping money into a traditional savings account instead of a high-yield savings account, you could be shortchanging yourself.
By how much? We’ll get to that in a bit.
What does high-yield mean?
It’s pretty common to see the term “high-yield” account described as a "high-interest rate" account, probably because the idea is that you typically get a higher-interest rate that you would with a traditional savings account.
When it comes to savings accounts, interest is the amount of money you earn for leaving your money deposited with a bank. It’s typically expressed as an annual percentage yield (APY), which is the amount of interest you could earn over a year, assuming that funds are not added or withdrawn. APY accounts for compound interest, which is effectively making money on your money. The more often the interest compounds, the more money you could earn.
Compounding is important because the interest rate is applied to your balance, and the bigger the balance, the more interest you could earn.
If you’ve been eyeballing savings accounts, you’ve might have seen both the interest rate and the APY listed for some savings accounts; but the APY tells the fuller story.
Here is a quick way to eyeball the impact that different annual percentage yields can have on your savings goals.
How much more interest could you earn?
The APYs on some savings accounts might not result in a lot of change to your balance. Check out this chart to see what we’re talking about.
How to choose the best high-yield savings account
To choose the right account for you, it’s a good idea to gather as much information about the account itself.
Here are a few questions to consider:
- Is there a minimum balance or minimum opening deposit? Some savings accounts require a minimum amount of money to open the account. They may also offer different APYs based on how much money you have in the account .
- Are there any fees? Fees are important to watch for because they could eat away at the interest you’re earning. For example, if your account has a $5 monthly maintenance fee, that’s $60 dollars you’re giving up every year.
- How frequently does interest compound? Compounding is what turns a rate into a yield – it’s about how frequently the interest you earn in an account is added to your balance. Compounding is important because the interest rate is applied to your balance (principal and any interest earned), and the bigger the balance, the more interest you could earn. All things being equal, if one account compounds daily and one compounds monthly, why not make money on your money every day?
- Do you have to open other accounts? Banks want more of your business. To get a better APY on a new savings account, some banks, for instance, may also require you to open a checking account.
- Is your account FDIC insured? This is an important thing to check off when vetting who you’re willing to give your money to. This page on FDIC insurance explains why.
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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.
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