High Yield Savings Account: What It Is and How It Works (2024)

If you're looking to grow your savings, ahigh yield savings accountis an ideal place to safely store your money while earning excellent interest.

Whether you're building anemergency fundor saving to buy a home, this type of savings account can help you reach your financial goals.

But what is a high yield savings account? How do high yield savings accounts work? Your savings journey starts with learning the basics, including how to open a high yield savings account and how the features differ from other types of bank accounts.

What Is a High Yield Savings Account?

A high yield savings account, also referred to as a high interest account, is a type of savings account that offers better-than-averageinterest rateson deposits. Typically, high yield savings accounts pay significantly more than the national average interest rates of a standard or traditional savings account.

In addition to the benefit of better returns, a high yield savings account allows your money to grow risk-free, making it ideal for storing short-term savings. For example,investing in the stock marketmay historically bring higher annual returns, but that also means accepting the risk of market volatility and unpredictable annual returns, whereas a high yield savings account generally offers a competitive interest rate on all your deposits. While the interest rate is variable and can fluctuate, a high yield savings account is a great option if you want to grow your savings while avoiding the risks associated with investing in the stock market.

Furthermore, high yield savings accounts are usually Federal Deposit Insurance Corporation (FDIC) insured, provided your bank hasFDIC insurance. This means that even if your bank fails, your funds will be protected up to an applicable amount. Another advantage for short-term savers: Unlike acertificate of deposit (CD), you can generally access the money whenever you need to. The Federal Reserve no longer limits how often you can make withdrawals, although some banks may still restrict access.¹At Synchrony Bank, you can take money out of your account whenever you need it.

Benefits

There are several benefits of high yield savings accounts, including:

• • Higher interest rates.Typically pays significantly more than the national average of a standard savings account. TheSynchrony Bank High Yield Savings Accountoffers a competitive interest rate to help you grow your savings.
• • Flexibility.Your money isn't locked in and can be cashed out without penalty at any time. The flexibility of a high yield savings account is ideal for short-term savings goals like saving for adown payment on a homeor adream vacation. Keep in mind that while banks are no longer legally required to limit how many times you can withdraw your funds, some still do and may charge fees for going over their monthly limit.¹
• • Risk-free saving.Offers a set (but variable) interest rate on all your deposits. Your money is also FDIC-insured.
• • Good for achieving short-term savings goals.With better-than-average interest rates, high yield savings accounts make it easier to build your savings pool and meet your short-term goals.
• • Ideal for an emergency fund.A high yield savings account is a safe, accessible place to park youremergency fundand build yourfinancial resilience. You'll earn interest on the money when you're not using it, and you can take out funds as needed.

Downsides

For some savers, there could be some disadvantages as well:

• • Not for daily banking.Savings accounts aren't designed for everyday banking; they're a place to stash cash you don't plan on spending right away. A checking account, on the other hand, is used for daily transactions such as buying groceries and paying the bills.
• • More requirements to open than a standard savings account.Because high yield savings accounts offer better interest rates than standard savings accounts, they may have stricter requirements, such as a higher initial deposit amount or withdrawal/transfer limits.
• • Not the best for long-term financial goals.While you'll earn interest on a high yield savings account, it's not enough to keep up with inflation or hit long-term goals likesaving for retirement.
• • Fluctuating interest rate.Unlike with aCD account, the interest rate you receive in a high yield savings account is not set in stone. The bank can change the rate at any time.

MORE:Expert Advice on Why You Need a High Yield Savings Account

How Do High Yield Savings Accounts Work? Withdrawals and Money Transfers

A high yield savings account can be linked to your checking account, so you can easily transfer funds through your bank's mobile app or online. If you need to access funds, you can transfer money to your linked checking account or withdraw cash through an ATM. However, some banks may limit you to six withdrawals or transfers per monthly cycle.

Understanding APY

When you deposit money into a savings account, the bank pays you interest for keeping your money with them, known as the annual percentage yield (APY)—meaning how much you may earn from your investment in a year. All you have to do is open an account and start making deposits, and you'll receive interest on your account at the rate and time listed by your bank.

Compound Interest

Theinterest rateis what differentiates high yield savings accounts from standard savings accounts. Although there isn't a set percentage that's considered a "high" APY, getting an interest rate that exceeds the national average can make a big difference in your savings growth. Because interest rates constantly fluctuate, financial institutions regularly update the APYs offered on their deposit accounts, so the interest rate on your high yield savings account could go up or down.

How to Calculate Interest on a High Yield Savings Account

To find out how much you'll earn in interest through a high interest account, you can calculate it yourself using this formula:Interest = P x R x N

• Pis the principal amount

• Ris the interest rate

• Nis the time period (usually 1 is used to represent one year)

Say, for example, you have a high yield savings account with a $5,000 balance (P) and an interest rate of 0.60% (R) over one year (N). The decimal of 0.60% is 0.006, so the formula is:

Interest= $5,000 x 0.006 x 1, which equals $30 in interest.

You can also use ourhigh yield savings calculatorto see how much you could earn through Synchrony Bank compared to other leading banks.

What Is the Average Interest Rate for High Yield Savings Accounts?

The interest rate on high yield savings accounts varies by financial institution. The amount of interest often changes based on the interbank exchange rate set by the Federal Reserve.

When the Fed increases rates, banks usually increase the APY they offer on their high yield savings accounts. And when the Fed keeps rates low, financial institutions usually offer lower rates.

For example, before the Great Recession of 2008, some banks offered savings account rates as high as 6%.²By 2009, the national rate for savings accounts had fallen to an average of 0.2%.³

High yield savings accounts often offer interest rates that are several times the national average. Because the Fed has increased rates in the past few years, the amount of interest offered by institutions has also risen.

How to Compare High Yield Savings Accounts

Debating between two or three different high interest savings accounts? Here are some things to keep in mind to help youchoose the best accountfor you:

• • Interest rates.What is the APY? Is it a promotional rate, and when does it expire? Do you need to hold a minimum or maximum balance threshold to earn the interest rates? Remember, the higher the APY, the more your account will grow over the long term.
• • Fees.Compare the fees among banks. High fees can eat into your funds, diminishing the advantages of a high yield savings account. Instead, look for accounts that don't have any fees, like Synchrony Bank.
• • Customer service.Does the bank have good reviews? Do they offer chat support or alternative ways to connect? Make sure the bank you choose has good customer service so you can get the support you need if you have questions about your account.
• • Minimum balance and initial deposit.Some banks require you to deposit a certain amount of money to open an account. You may also have to maintain a minimum threshold for the account to stay open. Synchrony Bank has no minimum deposit or minimum balance requirement for its high yield savings accounts.
• • Compounding.How is the interest at the bank compounded? Whether the interest rates are compounded daily, weekly, monthly or yearly can have a big impact on how much interest you receive. The more frequently the money is compounded, the more you'll see your account grow.

High Yield Savings Account vs. Money Market Account

Money market accountsand high yield savings accounts are both FDIC-insured and offer competitive interest rates, depending on the financial institution.

However, there are some key differences between the two accounts. Unlike a high yield savings account, you can usually write checks with a money market account. Also, the interest rates offered in a money market account can be lower than the interest rates in a high yield savings account. If you need to easily access your funds using checks, a money market account might make more sense.

MORE:How Does a Money Market Account Work?

High Yield Savings Account vs. Certificate of Deposit

When you put funds in aCD account, you can't touch the money in the account until the maturity date. But with a high yield savings account, you can withdraw or transfer your funds whenever necessary.

A CD is a better option if you know you won't need your funds for a long time. But if you need the flexibility to access your savings, a high yield savings account could be a better option. For savers who want to lock in their interest rate, a CD is worth checking out, as interest rates for high yield savings accounts can fluctuate.

High Yield Savings Account vs. Checking Account

A checking account is designed to handle everyday transactions. As such, you generally earn little to no interest with a checking account compared to a high yield savings account. It's not uncommon for people to have both types of accounts. A high yield savings account can be used to set aside money for a rainy day fund, while a checking account is better for everyday spending.

How to Open a High Yield Savings Account

A high yield savings account can be opened at any bank, credit union or financial institution that offers it. With Synchrony Bank, you canopen a high yield savings account onlinein mere minutes.

If you're already a Synchrony Bank customer:Setting up a high yield savings account is easy. Just click theOpen Accountlink, sign into your account and follow the steps to begin.

If you're a new Synchrony Bank customer:Synchrony Bank makes it easy toapply onlineand can even approve your account within minutes. All you need is your information, including:

• • Your name
• • Address
• • Social security number
• • Copy of a government-issued ID (like a driver's license)
• • Checking account information to set up the initial deposit

You may also be asked for information about your background, such as current and past employment, and debt. As soon as you're set up, you can make a deposit and watch your funds grow.

Explore Synchrony Bank's High Yield Savings Account

With so many financial products on the market, it's important to find one that meets your goals. If you're looking to build up your wealth but don't want to risk your funds in the stock market or keep the money locked up in a CD, a high yield savings account is a great place to start. And with more flexibility and higher yields than a standard savings account, it's a good option to consider as you plan your financial future.

LEARN MORE:aboutSynchrony Bank's High Yield Savings account, and start saving for your future today.