What Is A High Yield Savings Account? How Do I Find One?

When you have spare funds sitting in your checking account, they stay stagnant and don’t accrue interest over time. If you were to transfer those funds into a savings account, specifically one with a decent APY—they may grow some nice extra cash for you to use in the future. With so many savings accounts out there, what’s the best way to find the one that works best for you? 

With some online banks, a $20,000 balance could earn $400 or more each year in interest.

High yield savings accounts can help you put away money, accrue more interest and reach your financial goals. Depending on where you live, online savings accounts can offer a varying degree of APY.

How Do High Yield Savings Accounts Work?

APY is how much the account will gain on average over the course of the year. Most banks use compound interest, which means that you continue to receive interest on the interest you’ve earned. With a .01% APY, a savings account with a $5,000 balance would only gain ten cents in a year. 

But with a high yield savings account, with a 2% APY, that $1,000 balance would be worth $1,020 after a year. The next year, the account would start earning interest on that total, so it would be worth $1,040.40. Banks can compound interest annually, monthly or — in some cases daily. The more frequently interest compounds, the more your savings will add up.

The percent difference might not sound like much, but that example also doesn’t include small, regular deposits as you continue to save. With online banks, you can set up automatic transfers from your direct deposit to ease the saving process. 

Is A High-Yield Account Right For Me?

Without the physical infrastructure of brick-and-mortar chains, online banks are nimbler and have less overhead to cover. That means they may be able to offer customers higher APYs than traditional banks. Most online banks are also backed by the Federal Deposit Insurance Corp (FDIC), which means that your savings account would be insured up to $250,000 like any traditional bank.

A savings account is not the best place to keep your money if you want it to grow in the long run. But it can be an effective way to stash away cash in the short term. High yield savings accounts can help you work towards a new car, an extended vacation or a buffer for emergency medical expenses.

If you receive your paycheck through direct deposit, you can automatically transfer a percentage, setting aside money that will add up over time. It’s also easy and secure to set up an account online in a matter of minutes.

The average savings account offers about as much annual return as hiding money under your mattress. But high yield savings accounts with low fees can make it easier to save money and prepare for the future.