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What is a high-yield savings account?

Name ____________________ Date __________

Key ideas

  1. Compare accounts by APY, not APR. APY includes compounding. A 4% APR paid monthly works out to about 4.07% APY over a full year.
  2. Rates are variable and can drop. At an example 4% APY, $6,000 earns $240 a year. If the rate falls to 3%, it earns $180.
  3. Check the insurance before you deposit. FDIC banks and NCUA credit unions insure deposits up to $250,000 per depositor, per institution, per ownership category.

Vocabulary

High-yield savings account
A savings account that pays a much higher interest rate than a typical bank savings account, often offered by online banks.
APY
Annual percentage yield: the yearly return on savings, including the effect of compounding. Use it to compare savings accounts.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Compound interest
Interest earned on both your original money and the interest it already earned, so growth speeds up over time.
FDIC insurance
US government protection that repays your deposits if an insured bank fails, up to $250,000 per depositor, per bank, per ownership category.

Work it out

Jordan has $6,000 of emergency savings in checking at 0.01% APY. Jordan compares an insured high-yield account at an example 4% APY.

  1. Emergency savings
  2. Example high-yield APY
  3. One year of interest at 4% APY
  4. One year of interest at 0.01% APY
  5. Extra interest in one year
  6. If the rate falls to 3% APY
  7. Interest at 0.01% APY
  8. Extra interest at the lower rate

Check yourself

  1. Which number should you use to compare two savings accounts?

    • A. APY
    • B. APR
    • C. The monthly fee alone
    • D. The bank's number of branches

  2. You keep $3,000 in an account paying an example 4% APY for a full year and the rate does not change. About how much interest do you earn?

    • A. $12
    • B. $40
    • C. $120
    • D. $400

  3. What can a bank do to the rate on a high-yield savings account?

    • A. Nothing, it is locked for life
    • B. Change it at any time
    • C. Change it only once every 5 years

Your turn

Look up the APY on your current savings account in your banking app. Then compare it with two insured online banks or credit unions, checking fees and minimums, and write down which account you would open.

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Answer key

What is a high-yield savings account?

Work it out

  1. Emergency savings$6,000
  2. Example high-yield APY4%
  3. One year of interest at 4% APY$240
  4. One year of interest at 0.01% APY− $0.60
  5. Extra interest in one year= $239.40
  6. If the rate falls to 3% APY$180
  7. Interest at 0.01% APY− $0.60
  8. Extra interest at the lower rate= $179.40
  1. At 4% APY, a year of interest on $6,000 is $6,000 × 0.04 = $240. Checking at 0.01% pays $0.60.
  2. The gap is $240 − $0.60 = $239.40 a year, with the same insurance.
  3. Rates can fall. At 3% APY the account pays $6,000 × 0.03 = $180, still $179.40 more than checking.

Check yourself

  1. A. APY APY includes compounding, so it shows what you earn in a year at the current rate. Banks must disclose it, which makes it the fair comparison.
  2. C. $120 $3,000 × 0.04 = $120. APY already includes compounding, so you can multiply directly.
  3. B. Change it at any time Savings rates are variable. Banks can raise or lower them at any time, often after the Federal Reserve changes rates.