How to Choose a High-Yield Savings Account

Mark KantrowitzBy Mark KantrowitzBy Savingforcollege.com

High-yield savings accounts offer higher interest rates than traditional savings accounts. High-yield savings accounts are good options for college students, parents and recent college graduates. But, how do you choose the high-yield savings account that best meets your needs?

Why Do You Need a High-Yield Savings Account?

A high-yield savings account provides a convenient place to park your cash. College students deposit financial aid refunds and other spending money to a savings or checking account. A debit card is a must for them, since they may not have access to credit cards due to the Credit CARD Act of 2009. Recent college graduates and parents might use a high-yield savings account for an emergency fund for unanticipated expenses, such as unemployment or auto repair. High-yield savings accounts are also suitable for saving for a short-term goal like a vacation or holiday presents.

The typical free checking account pays little or no interest, while a high-yield savings account can pay 1% or more. Some high-yield savings accounts pay almost as much as a certificate of deposit (CD), but with much greater liquidity.

Younger people, such as college students and recent college graduates, are more likely to have unexpected expenses, so a savings account may be better for them than a CD. Of course, one can always withdraw money from a CD before the term is over by paying a penalty of three months interest. But, the early withdrawal penalty may cause them to hesitate before withdrawing funds, and CDs usually don’t provide debit cards.


This chart shows the impact of a higher interest rate on the balance of a savings account with an initial balance of $1,000.

$1,000

1 Year

3 Years

5 Years

10 Years

0%

$1,000

$1,000

$1,000

$1,000

1%

$1,010

$1,030

$1,051

$1,105

2%

$1,020

$1,061

$1,104

$1,219

3%

$1,030

$1,093

$1,159

$1,344

4%

$1,040

$1,125

$1,217

$1,480

5%

$1,050

$1,158

$1,276

$1,629

6%

$1,060

$1,191

$1,338

$1,791

7%

$1,070

$1,225

$1,403

$1,967

8%

$1,080

$1,260

$1,469

$2,159

9%

$1,090

$1,295

$1,539

$2,367

10%

$1,100

$1,331

$1,611

$2,594



Criteria for Choosing a High-Yield Savings Account

Obviously, the most important criterion for choosing a high-yield savings account is the interest paid by the account. Long gone are the days when a bank would give you a free toaster oven or alarm clock just for opening a bank account.

Costs can Affect Value of a High-Yield Savings Account

Costs can affect the net return on investment, since high costs can offset a higher interest rate. Focus on high-yield savings accounts that have no fees. The best accounts will have no monthly maintenance fees and no ATM fees. Many will also offer free checks.

Consider whether the high-yield savings account has a minimum balance requirement. Will you be able to maintain enough money in the account to keep the account free? Some high-yield savings accounts will provide a higher interest rate for a higher account balance.

Check the monthly transaction limit. Does the account limit the number of fee-free ATM withdrawals or checking transactions per month? Compare the transaction limits with your current usage. Are you willing and able to change your habits in exchange for the higher interest rate? This might require withdrawing money from an ATM only once a week instead of daily.

Convenience and Accessibility Matter

Convenient ATM locations are important, especially if the fee-free debit card access is limited to the bank’s own ATMs. Count the number of ATMs within a mile of your home, school and work.

But, for college students, nationwide access may also matter. A national presence lets a student open the account and deposit money before arriving on campus. Parents can open an account in the same bank to make it easier to deposit money into the student’s account remotely. They may even be able to automate a weekly or monthly transfer. Also, if a student relocates after college graduation, they can take the account with them, instead of having to switch banks.

Most online bank accounts are accessible nationwide. Online banks also let you access your account anytime and anywhere, not just during regular banking hours. This is particularly convenient for college students, who may want to check their balance or pay bills at random hours of the day or night. Most online accounts provide smartphone apps for accessing the account.

Some high-yield savings accounts provide value-added services beyond basic banking. Examples include free online bill-paying services, budgeting tools and tax preparation. Many offer integration with Mint.com and Quicken to make money management easier.


Tradeoffs among Various Types of High-Yield Savings Accounts

The most significant tradeoffs for high-yield savings accounts will depend on the type of financial institution offering the account. There may be advantages and disadvantages to using an online account, an account with a credit union or local bank, and an account with a big bank.

  • National Accessibility. Both big banks and online accounts may be accessible nationwide, while community banks and credit unions may not have a national presence.

  • Personalized Face-to-Face Service. Small local banks and credit unions may provide more personalized service. Online savings accounts do not have a local brick and mortar presence, so you can’t meet customer service representatives face-to-face. Instead, you can talk to them over the phone or by a chat interface. Local banks and credit unions can provide some services through their branches that online banks can’t, such as notarization of documents, certified checks and teller checks. While most online-only banks can allow you to deposit dollar bills through an ATM and deposit checks by taking a picture of the front and back of the endorsed check, they can’t provide you with a roll of quarters for clothes washers and dryers.

  • Better Interest Rates. Online savings accounts, community banks and credit unions may offer better interest rates than big banks.

How to Find the Best Rates on a High-Yield Savings Account

Shop around to find the high-yield savings account that best satisfies your criteria while offering a high interest rate. Compare interest rates based on the Annual Percentage Yield (APY), which shows the impact of compounding vs. simple interest.

Consider online banks, as they may offer better interest rates because they don’t have the overhead of maintaining bank branches. Credit unions and community banks may also offer better interest rates.

Bankrate.com provides tools for comparing high-yield savings accounts.


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