Why you Should Open a High-Interest Savings Account

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When opening a savings account, a lot of thought is invested into what type of saving account provides the most benefits. Most times, high-interest savings account readily comes to mind.

A high-interest (also known as high-yield) savings account is a type of savings account that typically pays 20 to 25 times the national average of a standard savings account. Traditionally, people have held a savings account at the same bank where they hold their checking account, making transfers between the two easy and quick.

But with the advent of internet-only banks, as well as traditional banks that have opened their doors to customers across the country using online account opening, the competition on savings rates has skyrocketed, creating a new category of “high-yield savings accounts.”

Given the difference between high-yield savings account rates and the national average, the increase in earnings is significant. If you’re holding $5,000 in savings, for instance, and the national average is 0.10 percent APY, you would return just $5 over the course of a year. If you instead put that same $5,000 in an account earning 2 percent, you’d earn $100.

How do High-Interest Accounts Work?
Are High-Interest Savings Accounts Worth it?
Should I Open a High-Interest Savings Account?
What Should I Know Before Opening a High-Interest Savings Account?
What Bank has the Highest Interest Savings Account?
What’s Different Between High-Interest Savings, Money Market and CD Accounts?
How to Choose a High-Yield Savings Account
How to Open a High-Yield Savings Account
How Much Interest Will I get on $1000 a Year in a Savings Account?

How do High-Interest Accounts Work?

A high-interest 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-interest savings accounts vs. traditional savings accounts

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.
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.)
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.

Are High Interest Savings Accounts Worth it?

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.

Read Also: Best Bank Account Bonuses For You

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.

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.

Should I Open a High Interest Savings Account?

If you have any extra cash after covering your basic necessities and bills, you may want to consider putting it into a high-yield savings account. With a high-yield savings account, you can earn more interest while still having access to your cash when you need it.

Anyone deciding on what kind of savings account to use should first consider how soon they plan on dipping into the funds.

“It really all comes back to what they expect to use the money for in the future,” Anderson tells CNBC Select. “In other words, what is their timeline for needing to use this extra cash?”

In times like these, when you may be concerned about a recession in the near future, financial experts typically recommend prioritizing an emergency savings fund that you can access easily if the need arises.

“An emergency fund, since used for emergencies we can’t predict, should be treated as if the person might need that cash tomorrow,” Anderson says. “I think a high-yield savings account is a perfect way for someone to maintain their emergency fund.”

With other savings account options, such as certificates of deposit (or CDs), your money may earn a higher APY the longer you keep it in your account, but you are typically charged a penalty fee for withdrawing too soon.

But according to federal law, high-yield savings accounts allow you to withdraw or transfer your cash out of your account up to six times per month without paying any fees. (Note that this rule has been temporarily lifted during the coronavirus outbreak, and customers can “make an unlimited number of convenient transfers and withdrawals from their savings deposits,” according to a statement by the Federal Reserve Board.)

Money market accounts (or MMAs) have the same six-withdrawal limit and act similarly to high-yield savings accounts, but they often come with higher minimum balance requirements.

What Should I know Before Opening a High-Interest Savings Account?

Many people avoid high-yield savings accounts because they think they aren’t safe or don’t understand how they work. Keep reading to debunk the myths that keep you from earning the most interest on your money.

1. High-yield savings accounts are secure

Many people feel safer when they can see where their money goes. When you drive up to your local bank and make a deposit, you see the teller take the money. But you don’t see what happens once you drive away.

The process is the same whether you use a local bank or an online bank. The only difference is the lack of a teller at an online bank. Instead, you make your deposits electronically.

Using an online bank reduces the risk of human error. All transfers occur online or electronically unless you mail in a check. So long as you choose an FDIC insured online bank, your money is just as safe at an online bank as it is at your local branch. FDIC insurance covers $250,000 in deposits per account holder, per bank.

2. You don’t need large balances

Yes, some online banks require high balances to earn the highest interest rates, but many don’t have minimum required balances. Vio Bank, for example, requires just a $100 opening deposit/balance to earn its high APY.

Larger balances will earn you more money as the interest compounds, but that’s no reason to avoid online savings accounts. Everyone has to start somewhere.

Find online savings account at a reputable bank that requires a low opening balance and start saving. Set up automatic deposits, even if they are small, to increase your balance and the compounded interest you earn.

3. You can withdraw your money

Some people assume that when you bank online, it’s harder to get a hold of your money. In reality, you have easy access to your funds at an online bank. You can withdraw or transfer cash as often as six times per month, as that’s the maximum number of withdrawals the FDIC allows.

Keep in mind that it may take a little more time to withdraw cash, though. If withdrawals are important to you, research your options. Some online banks offer ATM access through nationwide ATM networks.

Star and Pulse are the most common networks. Check out the online ATM network locator to see how easily you could access your cash.

If your online bank doesn’t offer ATM access, you can transfer your funds electronically by linking external bank accounts. There will be some lag time from the time you transfer the funds and receive them (typically 24 to 48 business hours), but if you plan accordingly, you can have the funds when you need them.

Some online banks also offer:

Cash withdrawals at retail stores with your ATM card
Wire transfers
Over-the-phone withdrawals via check in the mail

4. Online savings accounts aren’t expensive

Look at your current savings account statement. Do you pay monthly maintenance fees? Many national banks also require a minimum balance to avoid a service fee. You won’t see this with most online savings accounts. Many people assume the fees will be higher because you get a higher interest rate, but that’s not the case.

Each online bank has its own rules, but most don’t charge monthly fees. Instead, online banks make up for the lack of fees by requiring minimum monthly deposits. For example, CIT Bank evaluates your monthly deposits during what it calls the “evaluation period.”

If you make a qualifying deposit of at least $100 during your evaluation period, you earn the higher APY for the month. If you didn’t make the required deposit, you still earn interest, just at a lower tier.

5. Customer service is available

Again, because you can’t see a teller, many people assume customer service lacks with online banks, but it doesn’t. If talking to a “real” person is important to you, make sure you choose a bank that offers over-the-phone customer service.

6. It’s easy to open an account

Don’t let the techy side of high-yield savings accounts scare you. Online banks make it easy to open an account. In a matter of minutes, you can start earning higher interest rates in your high-yield savings account.

All you need is personal identifying information (name, birthdate, Social Security number, address, etc.). You’ll then make a few decisions, such as the type of account, whom to name as your beneficiaries, and how to fund the account. Once you link an external account and fund your savings account, the process is complete.

If you prefer to wire your funds or mail a check, you can do that, too. Opening an account may then take a little longer, but only because the bank needs to process the deposit.

What Bank has the Highest Interest Savings Account?

The top rate you can currently earn from a nationally available savings account is 1.10% annual percentage yield (APY), offered by both Customers Bank and Sallie Mae’s SmartyPig. That’s more than 20 times the national average for savings accounts and it’s just one of the top rates you can find in our rankings below.

Below you’ll find the top savings account rates available from our partners, followed by our complete ranking of the best savings account rates nationwide.

Sallie Mae, SmartyPig High Yield Savings Account – 1.10% APY

Minimum initial deposit: $0
Minimum ongoing balance: $0.01
Monthly fee: None
ATM card: No
Mobile check deposit: No
Checking accounts available: No
CDs available: No
Note: The advertised APY applies only to the first $2,500 of your account balance, followed by a lower interest rate tier on the amount up to $10,000, a third APY on funds from $10,000 to $50,000, and finally a last tier for amounts above $50,000.

Customers Bank, The Ascent Money Market Savings Account – 1.10% APY

Minimum initial deposit: $25,000
Minimum ongoing balance: $25,000 to earn stated APY
Monthly fee: None
ATM card: No
Mobile check deposit: No
Checking accounts available: Only with linked Ascent Money Market Savings Account
CDs available: Only with linked Ascent Money Market Savings Account
Note: Although this account has “money market” in its name, it offers no check-writing privileges and instead operates like a savings account.

Fitness Bank, Savings Account – 1.05% APY

Minimum initial deposit: $100
Minimum ongoing balance: $100
Monthly fee: None with a $100 ongoing balance; otherwise, $10/month
ATM card: No
Mobile check deposit: No
Checking accounts available: No
CDs available: No
Note: In order to earn its highest rate, Fitness Bank requires an average daily step count of 12,500, which is tracked through its app. However, additional APY tiers are offered for lower step counts.

Affirm, Savings Account – 1.00% APY

Note: Only available and accessible via the Affirm mobile app
Minimum initial deposit: Any amount
Minimum ongoing balance: Any amount
Monthly fee: None
ATM card: No
Mobile check deposit: No
Checking accounts available: No
CDs available: No

Chime, High Yield Savings Bank – 1.00% APY

Minimum initial deposit: Any amount
Minimum ongoing balance: $0
Monthly fee: None
ATM card: No
Mobile check deposit: Yes
Checking accounts available: No
CDs available: No

First Foundation Bank, Online Savings Account – 1.00% APY

Minimum initial deposit: $1,000
Minimum ongoing balance: $0
Monthly fee: None
ATM card: No
Mobile check deposit: Yes
Checking accounts available: Yes in Calif., Nev., and Hawaii
CDs available: Yes in Calif., Nev., and Hawaii

Citi, Accelerate Savings Account – 0.90% APY

Minimum initial deposit: $0
Minimum ongoing balance: $0
Monthly fee: None with $500 minimum balance; otherwise, $4.50/month
ATM card: Yes
Mobile check deposit: Yes
Checking accounts available: Yes
CDs available: Yes
Note: May not be available in all zip codes

Nationwide by Axos Bank, My Savings – 0.90% APY

Minimum initial deposit: Any amount
Minimum ongoing balance: $0
Monthly fee: None
ATM card: No
Mobile check deposit: Yes
Checking accounts available: Yes
CDs available: Yes

TAB Bank, High Yield Savings Bank – 0.90% APY

Minimum initial deposit: $1
Minimum ongoing balance: $0
Monthly fee: None
ATM card: No
Mobile check deposit: Yes
Checking accounts available: Yes
CDs available: Yes

Axos Bank, High Yield Savings – 0.90% APY

Minimum initial deposit: $250
Minimum ongoing balance: $0
Monthly fee: None
ATM card: Yes
Mobile check deposit: Yes
Checking accounts available: Yes
CDs available: Yes

ConnectOne Bank, Online Savings Account – 0.90% APY

Minimum initial deposit: $2,500
Minimum ongoing balance: $2,500 to earn stated APY
Monthly fee: None
ATM card: No
Mobile check deposit: Yes
Checking accounts available: Only local where they have branches
CDs available: Yes

CFG Bank, High Yield Money Market Account – 0.90% APY

Minimum initial deposit: $1,000
Minimum ongoing balance: $25,000 to earn stated APY (CFG also offers a competitive rate for a lower minimum balance of $1,000)
Monthly fee: None with $1,000 ongoing balance; otherwise, $10/month
ATM card: No
Mobile check deposit: Yes
Checking accounts available: No
CDs available: Yes
Note: Although this account has “money market” in its name, it offers no check-writing privileges and instead operates like a savings account.

Vio Bank, High Yield Online Savings Account – 0.83% APY

Minimum initial deposit: $100
Minimum ongoing balance: $0
Monthly fee: None
ATM card: No
Mobile check deposit: Yes
Checking accounts available: No
CDs available: Yes

Varo, Savings Account – 0.81% APY

Minimum initial deposit: Any amount
Minimum ongoing balance: $0.01
Monthly fee: None
ATM card: Only with linked Varo Checking Account
Mobile check deposit: Yes
Checking accounts available: Yes
CDs available: No

SFGI Direct, Savings Account – 0.81% APY

Minimum initial deposit: $500
Minimum ongoing balance: $1
Monthly fee: None
ATM card: No
Mobile check deposit: No
Checking accounts available: No
CDs available: No

What’s Different Between High-Interest Savings, Money Market and CD Accounts?

Savings accounts and money market accounts are close cousins. Both allow you to move money in and out at your pleasure with their main function being to provide an option for you to sock away savings while earning interest on your balance. In both cases, interest will be paid to your account on some regular cycle, usually monthly.

In addition, the federal regulation that limits savings account withdrawals to six per month is applied to money market accounts as well.⁵

Traditionally, what differs between savings and money market accounts is that money market accounts usually include the option to write checks on the account. In contrast, savings accounts typically only allow fund withdrawals via electronic transfer, ATM cards (when offered), or in-branch visits.

Both of these account types differ substantially from CDs. Whereas savings and money market accounts represent a hierarchical step above checking accounts in terms of APYs, CDs are the next step up in earning more on your savings.

A CD is essentially a contract between you and the bank or credit union. Unlike savings and money market accounts, where the rate can change at any time, CDs offer a fixed rate that remains locked for a set period of time and the interest you can earn is usually higher than what savings and money market accounts are paying.

The trade-off is that your agreement with the bank entails keeping your money in the CD for an established maturity period, or term. CDs commonly have durations of three months, six months, one year, and so forth, up to 10 years. If you decide you need to withdraw the funds before the certificate matures, you’ll pay a financial penalty for doing so.

Contrast that with the liquid transfer of funds you can arrange at any time with a savings or money market account, while also noting that the more commitment you’re willing to make with your funds, the higher the APY you can earn.

How to Choose a High-Yield Savings Account

The most important advice is to shop around for the highest interest rates you can find. Our ranking is always available as a finger on the pulse of how much the best-paying savings accounts in the country are paying in any given week.

But accounts vary on a number of other factors besides APY, so you may find you’re personally better off choosing the fifth- or tenth-best rate in the country rather than the No. 1 rate. Fortunately, even at No. 10 on our list, you’ll still be outearning the national average by a magnitude of almost 25.

Among the most important account characteristics to consider after the rate are balance requirements and fees. High-yield accounts with no fees and no minimum balances do exist, in which case you’re free to hold as much or as little in the account as you’d like at any time.

But many high-yield accounts impose limits, such as a minimum balance threshold. Fall below it and you might not earn the high-yield rate or maybe hit with a fee.

In addition to minimum balance requirements, some accounts will require a minimum initial deposit, so you’ll also want to check if the necessary startup deposit is acceptable to you.

Note that if there is a minimum initial deposit but no minimum balance requirement going forward (or one that is lower than the initial requirement), you are free to withdraw the initial deposit funds at any time.

Also be aware of the fees that can be charged to different accounts. High-yield savings account fees usually take the form of a monthly charge if your account falls below the minimum balance requirement on any day during the monthly billing cycle.

Beware that you may also incur a fee if you make more than six withdrawals from the account in a month. Remember that this limit of six maximum withdrawals is standardized to the industry via federal regulation, so you can’t avoid it. But the fee that an institution charges for violating the rule will vary by bank.

Also take a look at any other features the account or bank offers. For instance, if you expect you’ll want to deposit checks to this savings account, be sure to choose a bank that has a smartphone app offering mobile check deposit. Alternatively, if you want to be able to write checks on the account, look for a money market account.

You’ll also want to check the bank’s rules regarding external bank transfers. Some banks are very flexible here, allowing more than one linked external account and also being able to link them right after opening the account.

But some high-yield accounts either only allow a single external account or will not allow any changes to the account linked for initial funding until a certain number of days or months have passed.

Lastly, if you aren’t feeling loyal to the bank where you hold your checking, switching to a new checking account is always an option.

Although it can be a bit of a project if you have direct deposit or autopay arrangements set up for your checking account, you might decide the legwork is worth it to establish both a checking account and a high-yield savings account at the same institution. If you’re potentially open to this, look for high-yield savings accounts from banks that also offer checking options.

How to Open a High-Yield Savings Account

For virtually all high-yield savings accounts, opening your new account will be an online process. After you have shopped around for the top savings account rates and then chosen the account with the best features and characteristics for your needs, it’s time to start your online application.

If the account you’ve chosen has an initial deposit requirement, you will likely need to link an external account during the application process, so have your routing and account numbers ready for the account you want to link. Other banks, though, will allow you to first open the account and fund it later (usually within a certain number of days).

Once you’ve completed the application process, you may be able to enroll in online banking right away or you may have to wait until you receive an email or mailed letter with your new account info.

In either case, once you’ve successfully established your online banking credentials, you can download the bank’s smartphone app and log in to interact with your account there.

In the app, or while logged into online banking on your computer, you can also decide which account alerts to turn on.

For instance, you may want your phone to send you a text message or app notification letting you know if a withdrawal or a deposit over a certain threshold was posted or whenever your statement is ready. The alerts offered will depend on the bank.

A couple of additional items may also be of interest but will likely be possible only within online banking, not the app. One of these is naming beneficiaries for your account, so the bank knows who is entitled to your funds should you pass away.

Another is linking any additional external accounts you’d like to use for transfers, should the bank allow for more than the initial linked account.

How Much Interest will I get on $1000 a Year in a Savings Account?

Knowing how interest on savings accounts works can help investors earn as much as possible on the money they save. Let’s say you have $1,000 in the bank and the account earns 1% interest. In fact, until around 2019, 1% was far more than what most banks were paying in savings accounts due to historically low-interest rates.

But with interest rates rising, some banks are offering savings accounts that yield over 2%. 1% is a good round number to illustrate this type of interest’s effects.

In the simplest of words, $1,000 at 1% interest per year would yield $1,010 at the end of the year. But that is simple interest, paid only on the principal. Money in savings accounts will earn compound interest, where the interest is calculated based on the principal and all accumulated interest.

So in the case of savings accounts, interest is compounded, either daily, monthly, or quarterly, and you earn interest on the interest earned up to that point. The more frequently interest is added to your balance, the faster your savings will grow.

So with daily compounding, every day the amount that earns interest grows by another 1/365th of 1%. At the end of the year, the deposit has grown to $1,010.05.

Okay, $0.05 more doesn’t sound like much. But at the end of 10 years, your $1,000 would grow to $1,105.17 with compound interest. Your 1% interest rate, compounded daily for 10 years, has added more than 10% to the value of your investment.

Yes, this still might not seem like much, but now consider what would happen if you were able to save $100 a month and add it to that original deposit of $1,000. After one year, you would have earned $16.05 in interest, for a balance of $2,216.05. After 10 years, still adding just $100 a month, you would have earned $725.50, for a total of $13,725.50.

Still not a fortune, but it’s a reasonable rainy-day fund. And that is the main purpose of a savings account. When money managers talk about “liquid assets,” they mean any possession that can be turned into cash on demand. It is, by definition, safe from fluctuations in the stock market and real estate values. In real-people terms, it’s the emergency stash.

Most of us have no desire to test what our savings might be worth in 200 years. But we all need to have a little money set aside for an emergency. Compound interest, combined with regular contributions, can add up to a decent emergency nest egg.