How Does a High-Yield Savings Account Work?

Everyone would love to make more money on their savings with little effort, right? Well, a high-yield savings account is one way to do just that!

If you’ve always kept your money in a traditional savings account, maybe you’ve accepted that you earn next to nothing in interest. The good news is that you can earn much more on your savings by opening a high-yield savings account. In this piece, we’ll explain how a high-yield savings account works, the pros and cons of using one, and the best ways to make these accounts work for you.

What Is a High-Yield Savings Account?

High-yield savings accounts are federally insured accounts that pay the account holder a higher rate of return on their balance. Currently, many of the best high-yield savings accounts pay between 1% and 2% interest, though in good economic times they can earn more than that. That’s a heck of a lot better than the national average for traditional savings accounts, which changes weekly but currently sits around 0.05% APY.

Also known as high-interest savings accounts, these are a great place to stash your money for an emergency fund or an upcoming purchase. You can access the money easily and quickly and watch your savings grow at a decent rate in the meantime.

A high-yield savings account makes a lot of sense for short-term savings goals, for which you’ll need funds within a year or so. You get a high rate of return while keeping the security of a basic savings account so you know you won’t lose money.

Brick-and-mortar banks and credit unions offer high-yield savings accounts, but you can find a wider selection through online banks.

How Much Can You Earn?

Most accounts pay some sort of interest, but traditional bank accounts usually only bring you a few meager cents a month.

Many high-interest savings accounts operate on a tiered system, with two or three different interest rates depending on your level of savings. With some high-interest savings accounts, the bank requires a minimum balance to earn the maximum APY.

If that amount isn’t possible, don’t worry! Plenty of banks and online savings accounts, like the CIT Bank Savings Builder Account, offer their highest interest rate to account holders who set up automatic deposits for a minimum amount, often as little as $100 per month.

Read the terms of high-yield savings accounts at different traditional and online banks to determine which one is best for you and gets you the highest possible APY.

Examples of Traditional vs. High-Yield APYs

Curious how much you can earn with a high-yield savings account? Let’s look at how a high-yield savings account works. Here’s an example comparing the amount of interest you could earn on a $1,000 balance with monthly compounding:

• Traditional savings account with a 0.06% APY over 12 months: about $6.00
• High-yield savings account with a 1.4% APY over 12 months: about $14.00

An extra $8 over one year won’t make a huge difference by itself, but imagine you have a larger balance sitting in your savings and you contribute to it each month. If you put in an initial $1,000 and add $150 a month for 24 months, here’s how your money would grow with monthly compounding:

• Traditional savings account with 0.06% APY: $4,603.45 ($3.45 gained in interest)
• High-yield savings account with 1.4% APY: $4,681.35 total ($81.35 gained in interest)

The difference is clear! High-yield savings accounts will put more money in your pocket.

Saving money on a tight budget is challenging, but every penny you save will help you reach your financial goals. Why not get a little extra help from a high-yield savings account that increases your account balance effortlessly?

Build Your Savings Fast with CIT Bank – Build your savings quickly with CIT Bank’s Savings Builder account. Earn 1.00% APY when you make a monthly deposit of just $100. Learn more here.

Best Ways to Use a High-Yield Savings Account

A high-yield savings account is just that — a savings account. So, you shouldn’t use the account for your everyday expenses. (Try one of these checking accounts instead!) If you’ll need access to this money within the next year or two, but not immediately, you may want to consider safely stashing your cash in a high-yield savings account.

Here are a few good reasons to use a high-yield savings account:

• Creating or maintaining your emergency fund, which you can use to cover unexpected expenses or a job loss (start with $1,000 and eventually increase it to three to six months’ worth of expenses)
• Saving for large purchases, such as a new vehicle or a down payment on a home
• Preparing for the holidays by putting away money all year long
• Starting a vacation fund for your next family trip

When you need a significant amount of money to reach short-term goals and you want to simultaneously protect it and enable it to grow, a high-yield savings account can help get the job done.

However, if you’re talking about funds that you won’t touch for several years or more, it’s usually better to look into long-term investment accounts or a certificate of deposit (CD).

Benefits of High-Yield Savings Accounts

There are plenty of solid reasons for opening a high-yield savings account today. Here are a few of the primary benefits:

• Painless automatic deposits so you can “set it and forget it”
• Easy access to funds without penalties (often limited to six withdrawals per month)
• FDIC-insured up to $250,000 per account, per bank
• Interest rates that are many times the national average for traditional savings accounts
• With some banks, both brick-and-mortar locations and online options
• Relatively low barrier of entry to earn the highest interest rates

Disadvantages of High-Yield Savings Accounts

As with any banking product, high-yield savings accounts come with some downsides. Here are some negative aspects to consider before deciding where to keep your money:

• Some banks or institutions charge monthly fees or service charges. Fortunately, you can avoid these fees by simply shopping around for the best free accounts.
• Interest rates on high-yield savings accounts are variable, which means they can drop at any time. These decreases in the APY are often grounded in a national shift, such as the Federal Reserve’s slashing of interest rates.
• In the past, you were typically limited to six withdrawals per month. However, the Federal Reserve recently lifted this rule in April 2020. Be sure to check the withdrawal rules of your specific account so you don’t get penalized.

Final Thoughts

When you need to set aside money to save for short-term goals and emergency funds, a high-yield savings account may be your best bet. It’s a great strategy to protect your money while ensuring that it continues to grow.

You no longer have to choose between savings growth and peace of mind that your balance won’t decrease. A high-yield savings account balances these two needs so that you get the best of both worlds.

Grow Your Savings Faster  – Get up to 1.00% APY when you open a new Savings Builder account at CIT Bank. That’s well over the national average and much higher than you’ll find at many traditional competitors. Follow the link to get started.