What is a high-yield savings account?

A high-yield savings account is an insured savings account that pays a higher interest rate than a typical bank savings account. It is a good home for an emergency fund and short-term goals because the balance doesn't rise and fall with the market and you can reach it within a few days.

It is a normal savings account with a better rate

Online banks and credit unions often pay more because they have lower costs than banks with many branches. The account works the same way: you deposit, it earns interest, you withdraw when you need to.

Compare accounts by APY

APY is the annual percentage yield. It includes the effect of compounding, so it tells you what $100 earns in a year if the rate stays the same. Banks must show it, which makes it the fair number for side-by-side comparisons.

The rate can change at any time

Savings rates are variable. A bank can lower or raise the rate without notice, often after the Federal Reserve changes its own rates. Treat any rate you see as today's rate, not a promise.

Check that it is insured

Bank deposits are insured by the FDIC up to $250,000 per depositor, per bank, per ownership category. Credit union deposits are insured by the NCUA up to $250,000 on the same terms. Confirm the account is held at an insured institution before you open it.

How a high-yield savings account works

You open the account, link it to your checking account and move money in. The bank pays you interest on the balance, usually added once a month. Interest is figured on the money in the account each day, so the more you keep there and the longer it stays, the more you earn.

There is no special product behind the name. High-yield is a marketing label for a savings account that pays more than average. Some banks call a similar account a money market account, which may come with checks or a debit card. Both are insured deposit accounts, and both have variable rates.

APY and APR are different numbers

APR is the annual percentage rate. On savings it is the plain yearly rate before compounding. APY adds compounding in, so it is the number that matches what you actually earn over a year.

Say an account pays 4% APR and adds interest monthly. Each month you get 4% ÷ 12 of your balance, and next month you earn interest on that interest too. Over a full year that works out to about 4.07% APY. The gap is small at savings rates, but it means two accounts with the same APR can show slightly different APYs. Compare APY to APY.

You will also see APR on credit cards and loans, where it is the cost of borrowing. On a savings account you want a high APY. On a card you want a low APR.

Why the rate goes up and down

Savings rates tend to follow the short-term rates set by the Federal Reserve. When those rates fall, banks usually cut savings rates within weeks. When they rise, banks raise them, sometimes slowly.

A high rate today can be an average rate next year. That is fine for money you need to keep safe, since the balance itself never shrinks. Check your rate once or twice a year. If it has fallen well below what other insured accounts pay, moving the money takes a few minutes online.

Watch for teaser rates. Some accounts pay a high rate only for the first few months, or only on the first few thousand dollars. Read the rate terms on the account page before you open it.

Getting money in and out

Most online savings accounts don't have branches or ATM cards. You move money by electronic transfer to your linked checking account. Transfers between different banks often take 1 to 3 business days, and transfers started late in the day or on a weekend wait for the next business day.

That small delay is useful. It puts a pause between you and the money, so it gets used for real needs. For a true emergency, plan to pay with a debit card or a card you pay off in full, then move the savings over to cover it.

A federal rule used to cap some savings withdrawals at 6 a month. The Federal Reserve dropped that cap in 2020, but many banks still set their own monthly limit or charge a fee for extra withdrawals. Check the account terms.

How to compare accounts

Start with insurance. The bank should be FDIC insured, or the credit union NCUA insured. You can check either one on the regulator's website. Some apps hold your money at a partner bank, so confirm which bank holds the deposit and that it is insured.

Then look at the APY, monthly fees, minimum balance to earn the rate, withdrawal limits and how long transfers take. A slightly lower APY with no fees and no minimum often beats a higher APY with conditions you might miss.

Interest you earn counts as taxable income in the US. If you earn $10 or more in a year, the bank sends you a form 1099-INT, and you report the interest on your tax return even if no form arrives.