What Is a High-Yield Savings Account?

You finally set up a savings account for that kitchen renovation you’re planning to start next year. And though you’ve been diligently stashing away, you’d love to give your cash a boost to help fund that splurge-worthy backsplash you’ve been eyeing.

That’s where a high-yield savings account comes in. These accounts offer a higher interest rate, also called annual percentage yield (APY), than traditional savings accounts. And the higher the interest rate on your account, the more opportunity your money has to grow, thanks to compound interest.

If you’re looking for a place to park your cash until you’re ready to decide on that kitchen tile, here’s why you might consider placing it in a high-yield savings account.

1. HIGHER INTEREST RATES

There’s no official threshold that pushes a savings account’s APY into the high-yield category; it’s more that the rates are higher compared with the interest rates you’ll see commonly offered by banks (hence why high-yield savings accounts are also called high-interest savings accounts).

For instance, the average interest rate on a savings account as of mid-May 2017 was 0.06 percent, according to the Federal Deposit Insurance Corporation. But if you’re shopping around, you’ll notice some rates can be as low as 0.01 percent. High-yield savings accounts, on the other hand, offer interest rates closer to 1 percent, and maybe even higher.

While those figures might seem small, they do make a big difference. For example, if you put $1,000 into a savings account with a 0.06 percent APY, you’ll make 60 cents off your money after a year, even with interest compounded daily. But if that account earns 1 percent, you’ll have made $10.05!

2. THEY’RE LOWER RISK THAN INVESTMENTS

Got a money goal you’re trying to reach that’s less than five years away, whether it’s a dream vacation, your new car fund or finally getting that nursery built? A high-yield savings account is a good place to consider putting your savings.

The reason why you may opt for that over an investment account is because of the risk that you could lose some money if the markets get volatile — and the shorter your time frame, the higher that risk could be.

A high-yield savings account is also a good place to put your emergency fund because it gives your money a chance to grow while being 100 percent liquid, which means it’s always accessible to you in a pinch. Note that money market accounts are often considered interchangeable with a high-yield savings account, but the funds in a money market account are invested by the bank, which means there is still some risk involved.

3. THEY’RE EASY TO OPEN

You may find that a lot of online banks advertise high-yield savings accounts because they don’t have the same overhead costs as their brick-and-mortar counterparts, which means they can pass those cost savings onto consumers in the form of higher interest rates.

But both traditional and online banks offer these types of savings accounts, so it’s important to shop around for the best APY. You should also read the fine print on those high-interest offers, because you might have to meet some terms and conditions to qualify.

If you’re looking for a place to park your cash until you’re ready to decide on that kitchen tile, you might consider placing it in a high-yield savings account.

WHAT TO CONSIDER BEFORE OPENING A HIGH-YIELD SAVINGS ACCOUNT

Speaking of fine print, here are a few things to check for when comparison shopping:

• Whether the advertised APY is permanent or just an introductory offer
• How often the interest is compounded, and how often they credit your account with that interest (the more frequent, the better)
• How much money you need to deposit to open the account
• Whether there is a minimum balance required
• If there is a monthly fee, or a fee for falling below the minimum balance
• Whether the bank requires you to open other accounts (like a checking account) in order to get the APY

Also, if you want to go with an online bank, make sure you’re completely comfortable using the internet for banking before you commit. Some people may want the option to walk into a branch if an issue arises.

Here’s one more pro tip: Consider keeping your savings account at a different bank from the one where you keep your checking. If they are both with the same bank, it might be too easy to transfer money from your savings back to your checking — which could increase the temptation to dip into your house fund, for example, if you find you’ve overspent one month. If you keep that savings where it is, you’ll be able to reach your goals faster.