The Basics of High-Yield Savings Accounts

High-yield savings accounts are a flexible and easy way to earn interest while saving money. They are perfect for short-term savings projects like creating a rainy-day fund but work just as well for folks who simply want to put their saved cash in a safe and trusted interest-bearing account with the knowledge that they can pretty much access it whenever they need it. Further, savings accounts from online banks can offer higher interest rates than many traditional checking and savings accounts. 

However, not all high-yield savings accounts are created equal. Here’s an explanation of these savings tools, with questions to ask before you pick one to match your needs. 

What Is A High-Yield Savings Account?

A high-yield savings account is a type of savings account that offers a variable interest rate that’s generally higher than rates available from a traditional savings account. Like traditional savings accounts, high-yield savings accounts give you the ability to make deposits and withdrawals. 

How Do Online Savings Accounts Work?

To use an online high-yield savings account, you first must apply to open an account with the bank of your choice—ideally one that meets your personal needs. To open an account, you’ll need to fill out an online application and provide required personal information, such as your name, address, and Social Security number. Once approved and the account is opened, you can begin to fund it.   

One way to put funds in or transfer funds out of your online savings account is to link the account to another of your checking or savings accounts and transfer funds electronically. Banks use different methods to link accounts, including a test process to confirm that the link between your other account and the new savings account is working by transferring a small deposit back and forth. Some online banks also accept personal checks that are sent by mail.   

In addition, you can set up an automatic transfer to regularly deposit a set portion of your paycheck—or transfer a specific amount from your checking account—electronically into the savings account.   

Once you have funds in your account, interest will be compounded according to your bank’s compounding schedule. Earned interest will then be deposited into your account, typically on a monthly basis. You can continue to deposit funds into your account, or withdraw funds, if and when you’d like—but note that some banks could limit the number of withdrawals you can make in a month. Since savings accounts are not meant for everyday spending, you likely won’t receive a debit card or checkbook for your account, but specifics depend on the bank. 

Interest-Rate Hikes Mean Better Rates—And Vice Versa

Interest rate increases mean it costs more to borrow, but the rate increases also act as incentive for banks to increase the interest they pay out on savings accounts and CDs.   

Conversely, interest rates may also decrease quickly as well. While low rates make it more affordable to borrow money, the APYs on interest-bearing accounts, like HYSAs, may drop also. 

Watch Out for Hidden Fees

One thing to watch for from both online and traditional banks is unexpected fees and restrictions. Before opening an account, make sure to check to see if any fees or restrictions may apply such as, for example, no-minimum-balance requirements, fees to open accounts, maintenance fees, wire fees to get money in and out of the account, or fees for paper statements. 

FDIC-Insured Savings Accounts

A key point about high-yield savings accounts from banks (along with checking accounts, CDs, and money market accounts) is that they are insured by the Federal Deposit Insurance Corp. (FDIC), which covers up to $250,000 per depositor, per account category, per insured bank. Stocks, bonds, mutual funds, annuities, and securities are not protected by FDIC insurance. 

Savings Account Security Checklist

A lot of the appeal of savings accounts is that they are a safe and flexible way to save. But safety also involves security, especially with ever-increasing online attacks on financial institutions. That’s why you want to make sure your savings account provider has protections surrounding your money. Here’s a security check list to use when comparing savings account offerings from different banks and financial institutions:

• Does the provider use multi-factor authentication, through one-time codes when you access your account from an unrecognized device, to prevent unauthorized access? 
• Does the provider block unauthorized access by using numerous secure firewalls? 
• Does the provider use Secure Socket Layer (SSL) encryption to create a secure connection with your browser when you log in or fill out an application online? This helps protect your personal information. 
• Does the provider automatically log you out of your account after a period of inactivity to prevent others from seeing or accessing your online accounts? 
• Does the provider guarantee it will not share your user names and passwords with anyone at any time?  
  

The Bottom Line

High-yield savings accounts are a proven, safe, and flexible way to help you save for short-term needs, or to just set aside your cash in an account that gets good earnings and where you know you can pretty much have access to it whenever you want. These accounts from online banks tend to offer higher interest rates than brick and mortar banks. But high-yield savings accounts are not all created equal, so asking key questions about minimum fees, charges, and security can help you get the best deal.  

Disclosure

This article has been prepared by a third party and is made available to you for information purposes only. This third-party article does not represent the opinions, views, or analysis of American Express, and American Express does not make any representations as to its accuracy or completeness. American Express offers products similar to those discussed by this article. If you have questions about the matters discussed in this article, please consult your own legal, tax, and financial advisors.