Check the interest rate on your savings account -- especially if you opened it at a bank in the neighborhood -- and you might discover that you're earning a terrible savings rate.
But you don’t have to.
There are a select number of banks – that primarily operate online – and pay interest rates at least 20 times higher than those paid by typical banks and credit unions.
You owe it to yourself to hold the majority of your savings in these high-yield savings accounts.
Not doing so is the equivalent of turning away free money, by choosing a low interest rate paid by your local bank.
Best High Yield Savings Accounts
Generally speaking, the banks paying the highest rates on savings operate mostly or entirely online. And as you might expect, the Internet is primarily where you’ll find them.
Below is a table listing some of the best high-yield savings accounts available:
Some of the banks will have names you’re familiar with. But many will be banks you’ve never heard of. That’s because they usually have few bank branches, or even none at all, and operate in another part of the country.
But that doesn’t mean they’re strange or exotic.
That means your money will be safe no matter where it’s parked, so you may as well take advantage of the highest rates you can earn.
Online banks with the best high-yield savings accounts have another benefit: they often have no monthly fees.
That means you’ll get the full benefit of the high-yield accounts.
How can these banks pay rates so much higher than local banks?
Remember I said earlier that banks with the best high-yield savings accounts primarily operate mostly or entirely online?
That’s really the “secret sauce” that enables them to pay such high rates.
Local banks, and even well-known money center banks, are limited in how much they can pay in interest to depositors because they have a high cost of operations.
A small bank with dozens of brick-and-mortar branches, or a large bank with thousands of branches, have to cover the overhead that comes with that network.
That includes not only the acquisition of physical locations but also the expenses connected with maintaining them, as well as the payroll needed to staff them.
But an online bank that operates with few or even no branches has none of that overhead.
No branches to acquire and maintain, and no payroll for the employees to run them.
That makes it possible for them to pay more of their revenue out to depositors in the form of higher interest rates.
Another factor is a limited menu of services
For example, an online bank may limit its services primarily to high interest savings products.
A few don’t even offer checking accounts, and many don’t offer commercial services, like small business banking.
Fewer services enable them to concentrate on the high-yield savings niche.
Why Hold Your Savings in a High Yield Savings Account?
The main reason to hold your savings in a high-yield savings account is to take advantage of the much higher interest you’ll earn on your money.
And that’s really all the reason you need.
Think about it this way – inflation has been at around two percent per year. If you’re only earning 0.01% APY on your savings at a local bank, you’re losing money!
Since a high-yield savings account is typically paying a rate comparable to inflation, you’re at least maintaining the real value of your savings.
There’s no denying:
There’s a certain convenience that comes with banking at a local branch.
However, because of the combination of low interest and high fees, local banks are generally not suitable places for the majority of your savings.
The best strategy is to keep most of your money earning high interest with an online bank, while maintaining an account with a local bank, for convenience, checking, business banking (if necessary), and other banking services.
That combination will give you the best of both types of banks.
How to Pick a High Yield Savings Account
There are several criteria you should use in picking the right high-yield savings account for you.
That will start with the interest rate, which is only the most obvious reason. There are others that should not be overlooked either.
Annual percentage yield (APY)
This is the effective interest rate a bank pays on a savings product, when compounding is taken into consideration.
Since each bank offers an APY that’s calculated based on the same criteria, it’ll be easier to make an apples-to-apples comparison between banks.
You should also be aware that interest rates on a savings account can change.
Unlike certificates of deposit, where the interest rate is set for a certain term, rates on savings accounts change with prevailing market rates.
That said, the same banks that are paying high rates on savings today were the same ones paying high rates one or two years ago.
Just like local banks, there are some online banks that charge a monthly fee.
Unless there’s a major difference in interest rates between two banks, you should certainly favor the one that doesn’t charge a monthly fee.
But be aware that even those that do charge a fee will usually waive it with a certain minimum balance. It could be $1,000, $5,000, or $10,000.
Be aware of any such requirements so you can avoid the fee.
Minimum opening deposit requirement
Surprisingly, many online banks have no minimum opening deposit requirements.
And even those that do usually set it fairly low. It might be $500, or $1,000. Though there are a few that have substantially higher minimums.
Minimum balance requirement
This is one of the most important factors in determining which online bank to choose.
A bank may have no minimum deposit or balance requirements, but they may impose a minimum to earn the best interest rate.
For example, a bank may pay 0.60% an account balance below $1,000, but 1.35% on the balance above.
Be sure you’ll be able to maintain the minimum balance required to get the highest rate.
Not all online banks offer mobile apps, which would eliminate the possibility of being able to make mobile deposits.
However, most do, and if they don’t, you can always make mobile deposits through your local bank account, then make an electronic transfer to your online high-yield savings account.
With an online savings account you’ll already have the limitation of not having access to local branches.
But many online banks get around this dilemma by providing an ATM card.
And even though they don’t have local branches and a proprietary network of ATM machines, they often participate in ATM networks with thousands of locations.
If you want easier access to your money, you should look for an online account that participates in a large ATM network.
Apart from ATM cards, the vast majority of online banks do offer mobile apps. There you’ll be able to make withdrawals and transfers to external accounts on the app.
However, since we’re talking about savings accounts, this is a good time to emphasize that all savings accounts are subject to Federal Regulation D, which limits the number of transactions in a savings or money market account to no more than six per month.
For that reason, the best accessibility option will be to transfer funds from your online savings account into a checking account. That may be offered by the online bank, and if not, you can transfer the funds into your local bank checking account.
Best Savings Goals for a High Yield Savings Account
As is the case with any type of savings account, but particularly one that provides a high-yield, they should operate as accounts to hold funds with intermediate purposes.
This can be savings you’ll need to hold for anywhere from a minimum of a few months to a few years.
Primary examples include:
High-yield savings accounts are absolutely perfect for emergency funds.
You can earn high interest on the funds sitting in the account while limiting your access to the money in favor of its intended purpose.
You can move it into your checking account when an emergency arises, but it mostly stays out of sight between now and then.
Home down payment
If you’re saving money for the down payment on a home, earning high interest will help your cause.
And much as the case with an emergency fund, an online account will keep the money sufficiently out of reach to prevent you from using it for other purposes.
The same principle applies as with saving money for a down payment on a home.
You can earn high interest as you build up your savings, while preventing yourself from using the funds for unintended purposes.
Weddings can be expensive.
Even if you’re getting help from family, it’s likely you’ll be paying at least some of that yourself.
Opening an online high-yield savings account is one of the best ways to save for that expense.
Since most people, couples and families take a vacation on at least an annual basis, saving up money for the trip before the fact is a good way to spread the cost over many months.
High-yield savings accounts are one of the best ways to accumulate vacation funds because they provide both safety of principal and a high return on your money.
You probably won’t want to close out your account with your local bank entirely.
But you owe it to yourself to earn higher interest on your savings.
The best way to do that:
Set up an account with an online bank that provides high-yield savings accounts, at least for the savings portion of your banking needs.