Everything You Need To Know About High-Yield Savings Accounts

Written By Jeff Hindenach
Last updated November 17, 2021

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November 15, 2021

Simple. Thrifty. Living.

The world of investing, 401(k), IRA, stocks and mutual funds isn’t as straightforward as investors would like it to be. For example, the name “high-yield savings account” can be misleading, as the rates of these accounts are not always high, and they tend to fluctuate pretty often. Continue reading to discover the pros and cons of high-yield savings account, how often the rates change and why, and whether or not you should invest in a money market account. Continue reading to discover the pros and cons of high-yield savings account, how often the rates change and why, and whether or not you should invest in a money market account.

High-yield savings accounts can have initial interest rates that make them quite attractive, and they offer returns that are higher than regular savings accounts. However, there are also terms specifying that the interest rate can be changed at any time, making it difficult to predict the interest rate going forward.

Despite this uncertainty, there are also a number of benefits. High-yield savings accounts offer much higher returns than typical savings or money market accounts. The funds are easy to access, they have low or no minimum account balance, and no fees.

When you deposit money into a high-yield savings account, the bank pays interest over time on the balance. What makes high-yield savings accounts unique from any other savings account is their much higher Annual Percentage Yield (APY) — around 0.4% to 0.6% versus just 0.06% for a general savings account.

So how do high-yield savings accounts work? Supposing you had $10,000 in savings, using an APY of 0.4% translates to a return of about $40 each year. By comparison, with the 0.06% APY for regular savings accounts, you’d receive just $6 in the same period.

It’s worth noting that the APY for a high-yield savings account can be even higher for online-only banks that specialize in these types of accounts: as much as 20 to 25 times higher than the APY of a regular savings account. This could mean an APY as high as 1.5% to 2%. The downside to going with an online-only bank is that you can’t withdraw money from an ATM or physical branch (which doesn’t exist) until it’s been transferred from the high-yield savings account to your primary checking account. That said, so long as you’ve gone with an FDIC and NCUA backed institution, there’s no need to worry about the security of your finances.

So do high-yield savings account interest rates change? Yes, this rate is variable and can fluctuate depending on the federal funds rate. This change can happen every quarter or every six months, though won’t be a drastic shift unless the economy is undergoing significant dips or rises.

Banks tend to adjust their interest rates when the economy changes. The Federal Reserve Open Market Committee meets every six months to decide if/how to adjust interest rates, which can occur every six months, at the end of a quarter or at the end of the month. However, a bank can also make an interest rate change as a marketing tactic. If an investor believes interest rates will be rising soon, positioning one’s savings in a high-yield savings account can set you up for taking advantage of a rate hike.

When it comes to a 401(k), IRA or savings account options, many conservative investors select the money market account route. However, a high-yield savings account could offer some advantages for shorter-term investors.

While a money market account has limits on withdrawals, savings accounts generally have few restrictions. Some high-yield accounts may also offer higher interest rates than money market accounts, although depositing a higher opening balance in both cases will up your rate. In general, high-yield savings accounts are best for shorter-term investors, while money market accounts are better for the long haul.

Whether you’re looking to save money or invest in stocks and mutual funds for your 401(k) or IRA, there’s an ideal financial path for you. Do your homework and always choose investment vehicles that keep you in your comfort zone.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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