High-Yield Savings Account

A high-yield savings account is a kind of savings account offering an above-average interest rate on deposits. Such accounts usually pay 20-25 times more than a traditional savings account, thus allowing depositors to grow their money significantly and achieve their short-term financial goals.

The interest earned from these accounts is the annual percentage yield or APY. The higher the APY on an account, the faster the money sitting in it grows. Typically, high-yield savings account rates are variable. When the Federal Reserve changes its benchmark interest rate, the interest offered by banks increases or decreases accordingly.

• A high-yield savings account means a savings account offering higher-than-average interest rates on deposits. Individuals can save money in such accounts to fulfill their short-term savings goals.
• The interest rate offered by a high-yield savings account does not remain constant. Instead, it changes according to the increase or decrease in the Federal Reserve’s benchmark interest rate.
• There are various benefits of high-yield savings accounts. For example, one can utilize such an account as an emergency fund. Moreover, one can save windfalls in this account.
• The interest rate offered is not high enough to mitigate inflation.

The High-yield savings account meaning refers to a savings account that enables depositors to earn significantly more interest on their money. Individuals typically favor such accounts during a falling interest rate regime. Moreover, these accounts are a popular option owing to their liquidity.

Individuals must go through the following points to understand how these accounts work:

• Deposit Money: These accounts enable individuals to deposit funds.
• Access funds: One can access funds deposited in the account via withdrawals or bank transfers.
• Safety: For every Federal Deposit Insurance Corporation or FDIC-insured bank, the standard insurance amount is $250,000 per depositor, financial institution, and account ownership type.  
• Transaction Restrictions: One must remember that savings accounts, including these, can be subject to monthly withdrawal restrictions. The federal government has suspended rules restricting account owners to a maximum of six withdrawals every month. That said, credit unions and banks can still limit the number of withdrawals one can make per month.
• Compound Interest: This allows depositors’ savings to grow quickly in such an account. The frequency of compounding depends on the savings account. While some compound daily interest, others compound monthly interest.

Typically, individuals hold savings accounts at a bank where they opened a checking account. This ensures that the transfer of funds occurs quickly and easily. Individuals who do not prefer visiting a bank branch can access such an account online.

Since such an account enables one to grow their money risk-free, it can be suitable for storing short-term savings.

Individuals can follow these steps to open such an account.

1. Gather All Personal Details: Individuals need to give the following information to the bank when opening this account:

• Social Security Number (SSN)

• Legal name

• Date of birth

• Residential address

• Phone number

• Identity documents, for example, a driver’s license

• Email ID

If an individual is not a U.S. citizen, they can still open this account by providing a permanent residency card, foreign passport, or an Individual Taxpayer Identification Number (ITIN).

2. Fill Out The Application Form: In most cases, it takes around 10 minutes to fill in the details in the application form. However, if a bank provides a strong customer experience, one may complete the application procedure faster

3. Fund The Account 

Once the identity confirmation is complete, individuals can transfer funds instantly into their accounts. You may have the option to mail in/deposit a check or transfer funds using a bank wire.

4. Set Up Online Banking: Individuals can visit the bank’s mobile-based application or website to set up digital banking using their username and password. The online account will enable them to check transaction history and make transfers. Moreover, it allows them to check their balance. Before opening this account, one must consider certain aspects. A few things are as follows:

• Interest Rate: One must remember that high-yield savings account interest rates fluctuate frequently, and the best rates might only be available for a limited period. Hence, one must check the terms and conditions to know whether the rate will change significantly.

• Minimum Balance: Individuals must know of the minimum balance requirements beforehand. Some banks tie the rates to the account balance, while others provide the same annual percentage yield across all balances.

• Account Fees: One may receive lower interest owing to certain fees. Hence, individuals must check the bank’s fee schedule and be aware of the various charges associated with such an account.

Let us look at a few high-yield savings account examples to understand the concept better.

Example #1

On December 1, The CFPB made a proposed consent order public to address a fraud committed by a company named Loan Doctor and its founder, Edgar Radjabli. The company claimed to provide high-yield savings accounts with APYs ranging from 5% to 6.25% and insurance coverage.

Since 2004, a minimum of 400 persons have put millions of dollars into a product of this company, believing that the company will utilize the deposits to provide financial assistance in the form of loans to medical professionals. But instead, they unknowingly put money into a hedge fund run by Radjabli known as Apis Capital Management, LLC. The hedge fund utilized the funds to buy cryptocurrencies and invest in actively-traded financial instruments. Moreover, it disbursed loans to people who utilized their equity portfolio as collateral for financial assistance.

Per the order, the defendants must refund $162,800 to roughly 400 depositors and $162,800 in disgorgement to the Securities and Exchange Board of India. Moreover, they must pay civil penalties to the SEC and CFPB, respectively.

Example #2

At the beginning of the year, John has $500 in his high-yield savings account, which offers an interest rate of 2% per year.

One can utilize the following formula to compute the interest for one year:

Interest = P x R x T / 100

Where:

• P = Principal amount
• I = Interest Rate
• T = Time

Therefore, the interest will be 500 x 2 x 1 /100, i.e., $10.

John’s account balance at the beginning of the new year will be $510.

The benefits of high-yield savings accounts are as follows:  

• One can utilize this account as an emergency fund.
• Individuals can save money in this account to fulfill short-term saving goals. For example, one can save to purchase a vehicle or meet the expenses of a vacation.  
• One can utilize this account to save windfalls, for example, stimulus checks and other payments.
• Such accounts are FDIC-insured.
• Individuals can transfer funds to other accounts easily from this account. Moreover, they can easily access such funds to meet urgent financial requirements.

Let us look at the cons of these accounts.

• Individuals might need to meet more stringent requirements than a regular savings account. For example, certain banks might require an individual to make a substantial deposit to be eligible to open an account.
• Accessing funds in such an account can be difficult if individuals hold their checking account with another bank.
• Although high-yield savings account interest rates are higher than regular savings accounts, the yield is not high enough to help individuals fulfill their long-term financial goals. Moreover, the interest is not high enough to keep up with inflation.

Individuals new to the world of finance often find the meaning of money market account, high-yield savings account, and certificate of deposit (CD) confusing. But, to eliminate such confusion, they must understand their critical differences. So, let us look at their distinct characteristics.

This has been a guide to what is High-Yield Savings Account. Here, we explain how to open it, its examples, and a comparison with a money market account. You can learn more about finance from the following articles –

• Preservation of Capital
• Individual Retirement Account
• Joint Account