How do high-yield savings accounts work?
While recent interest rate hikes on behalf of the Federal Reserve have caused hardship for those looking to buy a home or refinance their existing one, there has been a silver lining for savings account holders. For these people, many of whom have become accustomed to a minuscule return on their deposits (the current interest rate for savings accounts is around 0.33%), the Fed activity has provided a new way to earn more on their money.
By turning to high-yield savings accounts, depositors can earn an Annual Percentage Rate (APR) that's 10 times higher or more than a traditional account. And since these accounts earn more interest the new money will compound quickly, giving you substantially more money than you would have received if you left your account alone.
So how do these accounts work exactly? And how do you get started? You can begin by plugging in your zip code and the amount you plan on depositing here to find out how much more money you could be earning.
How do high-yield savings accounts work?
One of the great things about high-yield savings accounts (besides the attractive interest rates) is the ability to understand how they operate. It's pretty simple, actually.
These accounts operate similarly to savings accounts. As a refresher, when you put money into a savings account your credit union or bank will pay compound interest on the money you've deposited. The more you have in the account, the more you'll get. The interest you earn is deposited directly into your account (think direct deposit for your checks). Over time, the account earns more interest on the new, higher balance (assuming you haven't made any withdrawals) and the bottom line builds from there.
A high-yield savings account works the same way - just with a much higher interest rate. You can transfer your current savings account into a high-yield one by speaking to a representative from your bank or union. You can also link a high-yield savings account to your checking account to more easily move funds back and forth. Many high-yield savings accounts will offer debit cards for easier access to cash, although your withdrawals may be limited each month.
If earning extra cash on your savings account sounds good to you then start exploring your high-yield savings options here now or use the table below to get an idea of how much you could make.
How much a high-yield savings account earns
How much interest you can earn via a high-yield savings account depends on how much you're depositing and what rate your bank is offering, so be sure to shop around for the highest interest rate possible. Comparing a traditional savings account interest rate of 0.33% and a high-yield savings account interest rate of 3.50%, here's what you could expect for a few different amounts:
$500 balance:
- $1.65 after a year with a regular savings account with 0.33% APR
- $17.50 after one year with a high-yield savings account with 3.50% APR
$1,000 balance:
- $3.30 after a year with a regular savings account with 0.33% APR
- $35.00 after one year with a high-yield savings account with 3.50% APR
$5,000 balance:
- $16.50 after a year with a regular savings account with 0.33% APR
- $175 after one year with a high-yield savings account with 3.50% APR
The bottom line
High-yield savings accounts offer account holders a painless and simple way to earn significantly more interest than they otherwise would by keeping their money in a regular account. These accounts operate in a similar fashion to other savings accounts and can typically be utilized the way an account holder would access any other type of savings.
If you're ready to start earning more interest then start exploring your high-yield savings account options here now.
