How Do High Yield Savings Accounts Work?

A high yield savings account (HYSA) pays a higher interest rate compared to traditional savings accounts. They offer an easy, low-risk way to increase your savings through compounding interest. While HYSAs are offered by banks, credit unions, and online banks, you can usually get the best interest rates from online banks. High yield savings accounts are especially useful accounts to house your emergency fund or short-term savings since they're designed to boost savings rather than support frequent withdrawals. Explore the benefits of HYSAs and how they can help you.

How do high yield savings accounts work?

As mentioned, high yield savings accounts offer a much higher interest rate than regular savings accounts. Apart from the relatively high interest rate, these accounts have a few other differentiating factors. They may have account fees, minimum deposit requirements, and limits on the number and type of withdrawals. Some banks may not offer wire transfers, debit cards or checks. However, with interest rates as high as ten times the national average traditional savings accounts offer, HYSAs can be worth it.

A high yield savings account is a great way to grow your savings with minimal market risk. Getting an account in an FDIC-insured bank provides additional security since you're protected up to FDIC limits against bank failure.

Benefits of a high yield savings account

High yield savings account holders enjoy several benefits, ranging from high returns to minimal fees. These benefits may vary depending on the bank or financial institution in question, so it’s important to compare different account features before applying.

• High returns

Higher-than-average interest rates enable account holders to increase their savings faster. Whether you're saving up for a big purchase, a much-needed vacation, or some essential home repairs, a HYSA can help you meet your goals faster with high, low-risk returns.

• Outpace inflation

Inflation shrinks your dollar, and traditional savings accounts don't offer enough interest to keep pace. A high yield savings account is better suited to keep pace with inflation thanks to higher interest rates and the benefit of compounding interest. HYSA interest rates are typically variable, which means as market interest rises, so will your savings.

• Liquidity

One key benefit of a high yield savings account is that it helps you maximize returns while maintaining liquidity. Unlike other assets, including property, certificate of deposit (CD) accounts, stocks, and bonds, HYSAs allow you to withdraw your funds quickly. However, different financial institutions may place limits on how many withdrawals you're allowed in a month.

• Safety

The right high yield savings account can help you grow your money safely. Federal Deposit Insurance Corp. (FDIC) member institutions offer account holders coverage of up to $250,000 per depositor, per ownership category against bank failure. Additionally, your money is not subjected to the market risk common to mutual funds and other investment options.

• Low or monthly fees

With the right bank, you'll benefit from high interest without account fees affecting your returns. Traditional banks may carry account fees, but online banks typically offer low or no fees. It's essential to read the terms of your account carefully to identify potential fees.

How high yield savings accounts compare to alternatives

High yield savings accounts can be beneficial in many ways, but you should figure out how they compare to other options before determining the right option for you:

• High yield savings accounts vs. traditional savings accounts

A traditional savings account offers a much lower interest rate but generally has the convenience of easily withdrawing funds at a bank branch, transferring funds via online banking, or withdrawing money at an ATM. This makes a traditional account suitable for daily expenses. With a high yield savings account, you can also transfer funds via online banking or a mobile banking app, but some accounts may have a limit to how often you can withdraw. Some banks also require you to maintain a minimum balance to get the best rate.¹

• High yield savings accounts vs. certificates of deposit

A certificate of deposit requires account holders to lock their funds into the account for a fixed period. Withdrawing the funds before the maturity date may incur a fee. A high yield savings account offers easier access to funds by comparison. With CDs, interest rates are locked in when you create your account, so even if market interest dips, your interest earnings are unaffected during that period. However, HYSAs are subject to changing interest rates, so the offered rate may be lowered when rates are slashed.²

How much interest can you earn with a high yield savings account?

Interest rates can vary by institution, so comparing different banks and financial institutions is important before opening an account. Remember to consider fees and other factors before making a choice.

How often can HYSA interest rates change?

It's important to note that since APYs (Annual Percentage Yields) are variable, they can change at any time without notice.³ Variable savings rates are connected to the federal funds rate set by the Federal Open Market Committee (FOMC). The FOMC raises rates during periods of high inflation and may cut rates to encourage spending. While it’s not always possible to predict HYSA APY changes, these accounts are still useful for building emergency funds and short-term savings.

Learn more about high yield savings accounts

The right high yield savings account can be a great way to grow your money with lower risk while keeping your funds accessible. It’s a valuable solution for students and young professionals looking to boost their savings and for anyone looking to maintain their emergency fund. Openbank High Yield Savings account holders can get multiple benefits – discover the features of the Openbank High Yield Savings account and apply for an account in just five minutes.

Sources:

¹Experian – High-Yield Savings Account vs. Traditional Savings Account. Updated November 4, 2023 - Accessed September 18, 2024

²Kiplinger – CD vs. High-Yield Savings Account: Which is Better? Updated August 9, 2024 - Accessed September 18, 2024.

³Experian – How Often Do High-Yield Savings Rates Change? Updated March 22, 2023 - Accessed September 18, 2024.