What is a high-yield savings account?

Whether for an unexpected period of unemployment, car trouble or an unplanned expense, having some money set aside in an emergency fund can be a lifesaver. If you are going to put aside money for any reason, here’s why it makes sense to put your funds in a high-yield savings account.

Why high-yield savings account vs. traditional savings?

The main difference between a high-yield savings account and a regular savings account is that a high-yield savings account has an interest rate that is much higher than the rate paid by regular accounts. With internet banking becoming more and more prevalent, competition among financial services providers has led to more and more banks and credit unions offering savings accounts with these higher interest rates. That means it’s probably time to reexamine whether you should continue to keep your savings in the same bank where you’ve always had your checking account just because it feels like it’s easier.

Tradeoffs from traditional savings

Unfortunately, if you want to earn substantially more on your savings account, you may have to switch banks or give up the convenience of having all your accounts under one roof. A possible downside to opening one of these high-yield accounts is that some of the online providers don’t offer other accounts or services you may get from your local bank.

The good news is that it is getting increasingly easier to do electronic transfers between financial institutions and do it quickly. Today, once you’ve made the first transfer between your old account(s) and your new bank or credit union, you can just as easily transfer money from one institution to the other as you can between accounts within the same institution.

How to use your high-yield savings account

A high-yield savings account is a great way to make extra money while having the money liquid enough to deal with emergencies or unforeseen circumstances.

A common recommendation is to have three to six months of living expenses available to be prepared for unforeseen circumstances. You could also use a high-yield savings account to save for a big purchase such as a vacation, a down payment on a new house, or a new vehicle. It is best to use safe but higher-return investments such as a high-yield savings account for short-term plans like these.

Another way to use a high-yield savings account is as a place to put your surplus money from your checking account. If you find you have extra cash in your checking account after paying your bills and expenses, a high-yield savings account is an excellent place to put those funds. You are earning higher interest, yet it is still readily available if you need it.

You can use a high-yield savings account for any number of these reasons. And you don’t have to limit yourself to one account. You can set up separate accounts for separate purposes, each with its own personalized nickname. At Alliant, we call these additional savings accounts supplemental savings accounts. You could also have multiple high-yield savings accounts at more than one institution to keep them separate. Having various accounts at different institutions can make it easier to keep your savings funds away from the spending-money in your checking account(s).

What should you look for in a high-yield savings account?

Here’s what you should look for when shopping for a high-yield savings account. 

Interest rate

When evaluating high-yield savings, always make sure you shop for the best rate possible. Interest rates can vary greatly and make a big difference over time, especially if you have a large balance. Is the rate you see a long-term interest rate or an introductory rate? Are there different rates for different balance levels? Finally, make sure the rate you are comparing is not a short-term interest rate to entice new accounts.  

Minimum initial deposit and balance requirements

Make sure you understand what, if any, minimum deposit you must make to open the account. If a minimum deposit is in effect,  is the deposit amount within your means? Some accounts also require a minimum balance that you must keep to avoid fees or account closure. Ensure that the minimum balance is an acceptable amount that fits your plans. 

Associated fees

Make sure you understand any fees you must pay for various reasons. Understand what actions or situations can incur fees and how to avoid them.

Linking to other financial institutions

You’ll want to find out whether you can link your new account to your other account(s) easily so you can move money between them as needs arise. If the financial institution allows your accounts to be linked, find out whether any restrictions or waiting periods exist.

Accessing funds

If you have money put into a savings account to have easy access to those funds, it is crucial to understand how you can access them. Does the financial institution provide an ATM card or debit card? Ask whether you have other ways to get your money out when needed.

Ways to deposit

Find out how to deposit funds into your account. Can you deposit checks via mobile deposit, ATM or mail? With some online banks, electronic funds transfers are the only way. Depending on how you want to add funds to your account, understanding how to make deposits can help you decide which institution is best to open your new account. 

Compounding method

Is the interest compounded annually, semiannually, quarterly, monthly or daily? The period the interest gets compounded can potentially make a significant difference in your overall returns. Theoretically, the more often interest compounds, the better your returns. However, you can avoid this question by comparing the annual percentage yield (APY) versus the interest rate since APY already considers the compounding factor.

Get an award-winning savings account

Earn more interest without a monthly fee (if you elect for eStatements) in an Alliant High-Rate Savings account.

If you would like to learn more about saving money, read these articles:

• 3 types of accounts for smart savers
• What to look for in a savings account