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Budgeting & Saving

Everything You Need to Know About High-Yield Savings Accounts

A high-yield savings account is an interest-earning account at a bank or credit union that offers a higher interest rate on deposits than you'd get from a traditional savings account.

If you have cash you're looking to keep safe for an emergency or some other short-term goal, a high-yield savings account can earn you more money than a regular savings account could, while still keeping your money accessible.

How Do High-Yield Savings Accounts Work?

A high-yield savings account functions similarly to a regular savings account. When you set aside money in a savings account, your deposits earn interest according to the terms of the account.

The difference between high-yield savings accounts and regular savings accounts is that a high-yield accounts offer higher interest rates. The national average annual percentage yield (APY) on a regular savings account was 0.09% as of December 2019, according to the Federal Deposit Insurance Corporation, the agency that insures bank deposits.

In contrast, high-yield savings accounts offer APYs upwards of 1% and sometimes higher than 2%.

This means that if your money would otherwise be sitting in a traditional savings account, a high-yield savings account could earn you more money. Keep in mind, though, any interest you earn in any kind of savings account may be reported as taxable income.

High-yield savings accounts are a good place to stash cash that you need for an emergency or a short-term goal, such as a vacation fund or holiday spending fund.

In general, savings accounts aren't designed for frequent deposits and withdrawals like a checking account, so you'll be limited in how often you can move your money around. If you take more than six withdrawals in a month, you may be charged a fee for each withdrawal after that. If you take withdrawals too often, the bank or credit union could close your account or convert it to a checking account.

Should I Open a High-Yield Savings Account?

There are several reasons to consider opening a high-yield savings account, such as for an emergency fund.

It's generally recommended to have between three and six months' worth of basic expenses parked in a savings account in case of an emergency such as job loss, a medical need or major home repairs.

Another justification for a high-yield savings account is to accomplish short-term savings goals. For example, you may want to use a high-yield savings account to save for an upcoming family vacation, a home down payment, a holiday fund or any other short- to medium-term goal.

Building your emergency fund or other short-term savings goal in a high-yield savings account is a safer strategy than many alternative investments, including the stock market. Another perk is that your savings will be easily accessible when you need to get to it.

However, it's important to consider all of your options before you choose one. Here are some alternatives to consider:

  • Money market account: Money market accounts function similarly to high-yield savings accounts, but with a couple of key differences. First, you can write checks off your money market account, and second, money market account funds are invested in financial markets and may be able to provide a higher interest rate while keeping your money relatively risk-free.
  • Certificate of deposit: A certificate of deposit, CD for short, can provide a higher interest rate than high-yield savings accounts, but there's a catch: You're typically required to park your money in a CD for a set period, and you can't withdraw it without incurring a penalty. As a result, CDs are best for people who don't anticipate needing access to their savings, making it a poor choice, for example, for an emergency fund.
  • Stock market: Investing in the stock market is not the same as saving, but it may be worth considering if you don't anticipate needing your money in the near future—again, not a great idea for an emergency fund. Stocks can provide a much higher return on your investment than a high-yield savings account, but that opportunity for a high return also comes with a lot of risk that stock prices will drop and you'll lose money (you'll be hard-pressed to lose money in a savings account).

As you consider each of these options, think about which one would be the best fit for you based on your financial needs and goals for the future.

How to Open a High-Yield Savings Account

Once you're ready to take the next step and open a high-yield savings account, here's how to do it.

1. Shop Around

Just like with any other financial product, it's rarely a good idea to jump on the first offer you see because it's possible you'll find something better.

Do some research on high-yield savings accounts and compare rates, minimum balance requirements, fees and other account features. Also, look at the bank or credit union's mobile app and other services it offers. If you plan to open a new checking account, look at the same features for that as well to ensure you get the best overall package.

Finally, keep in mind that many high-yield savings accounts are offered by online banks that operate mostly or entirely online and don't have a wide network of physical branches (or any at all). If this is important to you, make a note of it as you're shopping around.

2. Gather the Required Documentation

To open a savings account, you'll typically need to provide several pieces of information. That includes but isn't limited to your:

  • Social Security number
  • Driver's license or passport number
  • Mailing address
  • Physical address
  • Name
  • Date of birth

If you're opening an account online, you may not need to provide any documentation during the application process, but it's best to have them on hand in case you need to upload a scan or picture of them. If you're opening the account at a brick-and-mortar bank or credit union, bring them with you.

You may also need to make an opening deposit to finalize the account approval process. You can typically do this with a paper check if you're opening the account in person, or with a bank account number or debit card number if you're going through the process online.

3. Set Up the Account

After your account has been approved, you'll need to go through the process of setting it up. That may include getting login credentials for your online account, connecting an external checking account, setting up automatic withdrawals from checking and more.

If you've opened multiple savings accounts for different savings goals, which some banks allow, organize them by providing a name or description for each account.

4. Decide What to Do With Your Checking Account

Take some time to decide whether to move all of your banking over to the new institution or just your savings.

Moving your checking to another bank or credit union can be time-consuming because you'll need to update your recurring bills, direct deposits and other transactions. But it'll also be more convenient because transfers from savings to checking are generally instant within the same financial institution.

If you move only your savings to a new institution, it can save you some time and potential hassle upfront. But if you need to move money from your savings account to your checking account, it can take a few days to transfer from one institution to another.

There's no right answer to how you should handle things, but these trade-offs should be kept in mind as you decide your next steps.

Does Opening a Savings Account Trigger a Hard Inquiry?

With most banks and credit unions, opening a high-yield savings account won't cause a hard inquiry to appear on your credit report. Instead, institutions will likely run a soft inquiry, which doesn't impact your credit score at all.

Some financial institutions do, however, perform a hard credit check during the application process. If this happens, the inquiry will remain on your credit report for two years and, in most cases, knock less than five points off your credit scores.

If you'd rather avoid the hard inquiry on your credit reports, check with the financial institution before you apply to make sure you understand its process.

What to Do if You've Been Denied a Savings Account

While you typically won't be denied a savings account based on your credit history, it could happen as a consequence of your past banking activity.

ChexSystems is a banking reporting agency that functions similarly to a credit bureau. It maintains a report of your deposit accounts with banks and credit unions, and if you have any negative items on your ChexSystems report, it could result in a denial. Possible negative items include involuntary account closure, unpaid negative balances, suspected fraud or identity theft, and more.

If you've been denied a savings account, check your ChexSystems report to see if there's anything that may have contributed. If you find something, take steps to clean up your ChexSystems report:

  • Dispute any erroneous or fraudulent information you find on your report.
  • If you owe anything, pay it off quickly and ask the institution to remove the negative record.
  • Settle with the bank if you don't have enough money to pay what you owe.

Of course, in some cases, you may just need to wait until a negative file falls off your ChexSystems report naturally, which typically takes five years. If this is the case, look into second-chance bank accounts and prepaid debit cards while you wait.

Be Careful of Rate-Chasing

As with loan and credit card interest rates, savings interest rates can vary from institution to institution, and no bank or credit union will always have the best APY. If you find a better APY elsewhere shortly after you open a new savings account, consider the amount of time it'll require to make the switch and whether the rate increase is worth it.

For example, if you move $10,000 from an account with a 1.70% APY to an account with a 1.80% APY, you're only going to make an extra $10 per year.

Also, keep in mind that if you move your money again, there's no guarantee you won't find a better rate somewhere else later on, and if you keep moving your money from one account to another, the return on investment may not be worth it.