Basics of High-Yield Savings Accounts

Compounding, compound interest - Compounding is the process of adding interest to your principal balance. Suppose you have $1,000 in an HYSA that is earning 4% annual percentage yield (APY) interest rate that compounds annually. At the end of the year, you would have $1,040 in the account. In the second year, you would earn interest on your original principal of $1,000 as well as the additional $40. If you leave the money in your account, you’d have $1,081.60 at the end of the second year. If compounding occurs daily, monthly, or quarterly, this helps your money grow faster. 

Here is the scenario assuming a $1000 deposit earning interest at 4% APY over 5 years compounding annually:  

APY - This stands for annual percentage yield. It tells you the actual rate of return on your HYSA after compounding, if you keep all the money in your account for a year. The more frequently interest is compounded, the higher your APY will be. If compounding occurs daily, every day you’ll earn interest on a slightly greater balance. An account that compounds annually will only increase its interest-earning amount once a year. The APY quantifies this effect. So an account with a 5% interest rate that compounds annually would have an APY of 5%, but one that compounds daily would have an APY of 5.13%. 

Minimum deposit - A bank may require a minimum amount of money to open a new HYSA. This is the minimum deposit.   

Minimum balance - This is the minimum you need to hold in the HYSA. The minimum could be based on a daily balance, monthly balance, or an average depending on the instituion. Not all high-yield savings accounts have a minimum balance.  

Maintenance fee - Some banks charge a monthly fee to maintain an HYSA, which decreases your return. Having a balance over a certain threshold can sometimes avoid this fee.  

A high-yield savings account works similarly to a regular savings account. HYSAs are best used to keep money that you do not expect to need for daily expenses.  

Traditionally, regulations limited the number of so-called convenient withdrawals (such as check transactions) from both HYSA and regular savings accounts to six per month before fees or penalties.  Those regulations have changed, but some banks maintain the restrictions. First Fed does not. 

Some HYSAs offer ATM access and/or check writing along with online banking, mobile deposit, and other services. But typically these accounts are not intended to be used for everyday spending or bill paying.  

Policies vary by bank, but some HYSAs require minimum opening deposits or average balances. Some institutions charge a monthly fee but will waive it if you maintain a certain balance.  

The one crucial distinction with HYSAs is the superior interest rate compared to regular savings accounts. It’s important to look at the APY because the yield reflects the effect of compounding. That makes it possible to compare accounts on an equivalent basis.    

The prospect of getting a higher rate of return on your savings makes high-yield savings accounts attractive, and that is the biggest advantage of these accounts. The higher APY means your money grows more quickly without any additional effort.  

There are other pros and cons to consider as well. These are some of the pros: 

• You can add to an HYSA at any time, unlike a certificate of deposit, savings bond, or Treasury bill. 
• You can automate your savings to an HYSA by setting up regular deposits from your paycheck and stay on track with your goals.
• You can easily separate your savings and your other money including your funds for daily expenses. Not seeing the dollars in your checking account may deter you from spending this money.
• HYSAs may discourage impulse purchases because your money is not accessible with a debit card.
• Deposit insurance means your savings are completely safe up to certain thresholds, backed by federal guarantee. 

In deciding whether a high-yield savings account is right for you, you’ll want to compare it to other options. Here are the main points of difference between HYSAs and some other popular alternatives. 

HYSA vs Traditional Savings
These two accounts are very similar except the high-yield account offers a much higher interest rate. 

HYSA vs Money Market Accounts

A money market account (MMA) acts as a hybrid of a checking and savings account. Money market accounts are offered by banks and are insured by the FDIC. MMAs are more likely to come with checks and debit cards, making it easier to spend money in the account, even though MMAs often have monthly limits on checks or transfers. 

On the downside, the interest rates on money market accounts generally are only a small bit better than on traditional savings accounts. There may be exceptions since there is no formal reason MMAs cannot pay rates that are competitive with HYSAs.  

HYSA vs Certificate of Deposits (CDs)

CDs are another type of bank account that can offer a relatively high interest rate, sometimes higher than the HYSA. The most important difference is that CDs have a set term, an amount of time in which you can only withdraw money by paying a penalty. 

Terms can range from one month to five years. Generally, the rate increases as the term lengthens. This inaccessibility makes certificates of deposit a poor choice for an emergency fund. 

With a CD, you know upfront the APY you will receive for the entire term while rates on HYSAs can change without notice. In a period of falling interest rates, this can make certificates of deposit attractive. When interest rates are rising, short-term CDs or HYSAs give you more flexibility to take advantage of higher yields.  

As one last point of difference, you can add money to an HYSA at any time. You fund a CD at the start of its term, and you cannot add funds over the course of its lifespan.  

If you are considering an HYSA, ask yourself these questions to decide if it’s a good choice for your circumstances:

Once you have chosen the financial institution, you are ready to fill out an application, which you can most often do online. Usually you will need to provide a driver’s license or passport, your Social Security number, and other basic personal information. 

Then it’s time to fund your new account. You can do this in a number of ways: 

FAQs 

These are some of the most common questions people have about HYSAs.