What is a high-yield savings account?

There are plenty of places to put your savings: in an envelope, in the stock market, in a checking or savings account. Each of these options has its pros and cons. 

So just what is a high-yield savings account? It’s a bank account with a higher interest rate than the national average. High-yield savings accounts are commonly offered by online banks, traditional brick-and-mortar banks, and credit unions.  

Sound like a savings option that could work for you? Read on to learn more about high-yield savings accounts.

Why do banks offer high-yield savings accounts?

High-yield savings accounts are often offered by online banks since they have less overhead than brick-and-mortar banks, says Chanelle Bessette, a banking expert at NerdWallet. That means they usually have lower costs and can pass along the resulting savings to consumers by offering higher interest rates. 

“Ultimately what they’re trying to do is be competitive, keep customer retention going, and make sure that they’re creating the environment that customers want from their bank,” says Bessette. When a bank has more customers, it has more access to funds, making it easier to offer loans that then produce income for the bank, she adds.

Why open a high-yield savings account?

Wondering why you’d want to open a high-yield savings account? Here are a few reasons:

Earn higher interest rates

High-yield savings accounts typically offer higher interest rates than you’d get if you kept your money in a regular savings account. “Right now, in early 2023, we’re seeing a lot of high-yield accounts that are offering 3% or higher, which is about 10 times the average,” Bessette says. The Discover Online Savings Account, for example, offers a competitive interest rate with no fees or minimum deposit.¹ 

Digitally access funds

Among the many reasons to open a savings account, another benefit is having access to your funds digitally. It’s easier to send and receive money, create multiple savings accounts for specific savings goals, and take advantage of the budgeting and mobile banking features your bank offers. 

Keep savings separate

It’s a savvy move to keep your savings separate from the money you use for everyday expenses, Bessette says. Separating the funds can keep your savings goals on track, since it’s easier to set savings goals and see your progress when the money is in a separate account. Having multiple savings accounts can also help you track your progress toward different savings goals. 

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How do high-yield savings accounts work?

With a high-yield savings account, you earn a certain percentage of interest on your money, known as annual percentage yield (APY). The higher the APY, the more interest you’ll receive. Banks typically pay out that interest monthly, Bessette says. 

High-yield savings accounts allow you to grow your money through compound interest, she adds. With compound interest, you earn interest on both your principal—in other words, your bank balance—and the interest you receive. For example, say you have $3,000 in a high-yield savings account with a 3% APY. After the first year, you’ll receive $90 in interest calculated on that $3,000 balance. In the second year, though, your interest payment will be based on your new balance: $3,090 (assuming you didn’t deposit or withdraw any funds). That means you’ll get $92.70 in interest for that second year, to bring your balance to $3,182.70. As you can see, the interest adds up over time, and the effect of compounding amplifies as your balance gets larger. 

Your bank sets its compounding schedule—it can be daily, monthly, quarterly, or annually. The more often the interest compounds, the more interest you earn.

Are high-yield savings accounts FDIC-insured?

The Federal Deposit Insurance Corporation (FDIC), a government agency, insures depositors to at least $250,000 or the maximum allowed by law if an FDIC-insured bank fails. Since this insurance protects your money, you may be wondering, are high-yield savings accounts FDIC-insured? The good news: Typically, high-yield savings accounts are FDIC-insured, but it depends on your bank, Bessette says. (Discover is an FDIC member.)

Are high-yield savings accounts safe?

If your high-yield savings account is held at an FDIC-insured bank, you can have confidence that it’s safe from the bank’s side. But the safety of your account isn’t just in the hands of the bank. “Ultimately, a lot of banking safety comes down to what you as a consumer are doing to protect your money,” Bessette says. To protect your bank account from fraud, make sure you protect your passwords, avoid clicking on suspicious links, and keep from logging into your bank account on open Wi-Fi networks. 

Are high-yield savings accounts worth it?

You have a lot of options for your money, so are high-yield savings accounts worth it? If you find a savings account with a high interest rate, it’s a great tool to have in your financial toolbox. It typically costs nothing to open a high-yield savings account, and the money you put into it will only grow over time. High-yield savings accounts are “the best option for immediately accessible money that, ideally, you’re earning a good interest rate on,” Bessette says. 

How do I pick a high-yield savings account?

When it comes to how to pick a high-yield savings account, interest rates are a key consideration. Bessette recommends comparing the rates offered by different banks, as well as comparing features like if a bank offers an easy-to-use mobile app and 24/7 customer service. “It’s a consumer’s market right now,” Bessette says. “There are so many options, so comparison shopping is really important, as is making sure that you’re getting the best deal for you and that you’re working with a bank that meets your needs.” 

You should also research a bank’s monthly fees, including any minimum balance requirements or overdraft fees, when trying to pick a high-yield savings account. Finally, do some independent research on the bank through external review sites. Make sure the bank is FDIC-insured and hasn’t had any major recent infractions. 

How much should I put in a high-yield savings account?

There’s no one-size-fits-all answer for how much to put in a high-yield savings account. It depends on what you’re saving for and your financial situation. 

For example, a high-yield savings account can be an ideal place to stash your emergency fund. As you manage your salary and grow your savings, you should get a good idea of how big an emergency fund you need. The general rule is three to six months of expenses, but “it really depends on what you’re comfortable with and what your spending habits are like,” Bessette says. 

You can also use your high-yield savings account for specific financial goals, which might include saving for a trip, car, or down payment on a house. “Those kinds of goals are going to be very specific to you,” Bessette says. “But savings accounts are a really great place to put your money, no matter what amount you’re thinking about.” 

How can I open a high-yield savings account online?

Now that we’ve discussed what a high-yield savings account is, you may be wondering how to open a high-yield savings account. Luckily, it’s a pretty straightforward process, and you can open a high-yield savings account online in just a few steps. These are the big ones: 

1. Fill out the application

As you apply online to open your account, you may need to provide personal identifying and contact information, as well as proof of identity. 

2. Set up login information

Create a username and password to access your account. To keep your personal information secure, choose a password with a combination of letters, numbers, and special characters that you don’t use for other accounts.

3. Fund the account

If the account has a minimum deposit requirement, you’ll need to deposit at least that much money. You can do this by initiating a bank transfer, depositing a check, or using a wire transfer. 

Ready to grow your money with a high-yield savings account?

A high-yield savings account keeps your money safe, easily accessible, and earning interest. And as interest rates rise, this type of account can help hedge against inflation. “We definitely recommend that people keep high-yield savings accounts as a way to earn money even when the economy is not as kind to our budgets,” Bessette advises.

If your money is stagnating in your checking account or a savings account with a low APY, you may want to consider moving your savings into a high-yield savings account, where it can safely grow. 

Now that you know the benefits, considerations, and how to pick a high-yield savings account, let your money start working for you with a high-yield Discover Online Savings Account. 

¹ Outgoing wire transfers are subject to a service charge.

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