High Yield Savings Account: What It Is and How It Works

If growing your savings is a priority, a high yield savings account offers an ideal mix of financial security and top-tier interest rates. Whether you're building an emergency fund or saving to buy a home, a high yield savings account can play an important role in reaching your financial goals.

But what is a high yield savings account? How do high yield savings accounts work? Here's a closer look at how high yield savings accounts work and how they differ from other types of bank accounts.

What Is a High Yield Savings Account?

A high yield savings account is a type of savings account that typically offers significantly higher interest rates on deposits when compared to the national average for traditional savings accounts. Higher interest rates mean your deposited funds grow faster, providing a greater return on deposits than standard savings accounts.

In addition to the benefit of better returns, a high yield savings account allows your money to effectively grow risk-free, making it ideal for storing short-term savings and specific savings goals.

Another advantage for short-term savers: Unlike with a certificate of deposit (CD), you can generally access the money whenever you want without penalty. 

High Yield Savings vs. Stock Market

Investing in the stock market may bring historically higher annual returns, but also the risk of market volatility and unpredictable annual returns. A high yield savings account generally offers a competitive interest rate on all your deposits without the risk of losses. While the interest rate is variable and can fluctuate without notice, a high yield savings account can be a great option for growing your savings while avoiding the risks associated with investing in the stock market.

FDIC Insurance

High yield savings accounts are almost always insured by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance means that even if your bank goes out of business, your funds will be protected up to FDIC limits.

Pros and Cons of High Yield Savings

High yield savings are an excellent account for many situations, but they're not always perfect. Here's a look at the pros and cons of high yield savings to consider.

Pros

High yield savings accounts feature several key benefits. Top perks include:

• Above average interest rates: You'll typically earn significantly more than the national average for a standard savings account. The Synchrony Bank High Yield Savings account offers a competitive interest rate to help you grow your savings.
• Flexibility: Your money isn't locked in and can be accessed without penalty at any time. The flexibility of a high yield savings account is ideal for short-term savings and specific savings goals, like a down payment on a home or a dream vacation. Keep in mind that while banks are no longer legally required to limit how many times you can withdraw your funds, some still do and may charge fees for going over their monthly limit.¹
• Risk-free savings: High yield savings accounts come with a level of predictability, with a set (but variable) interest rate on all deposits. Funds are FDIC-insured, ensuring you'll get your money back, up to FDIC limits, even if the bank fails.
• Good for short-term savings goals: With better-than-average interest rates, high yield savings accounts make it easier to build your savings and reach short-term goals.
• Ideal for an emergency fund: A high yield savings account is a safe, accessible place to park your emergency fund and build your financial resilience. You'll earn interest on the cash when you're not using it, and you can take out funds if needed.

Cons

For some savers, there could be some disadvantages as well:

• Not good for daily transactions: Savings accounts aren't designed for everyday banking. They're a place to store cash you don't plan on spending right away. A checking account, on the other hand, is ideal for daily transactions such as buying groceries and paying bills.
• More requirements to open than a standard savings account: Because high yield savings accounts offer better interest rates than standard savings accounts, they may have stricter requirements, such as withdrawal limits or higher initial deposit amounts. Depending on the bank, minimum balance requirements may apply to avoid a monthly service charge. Synchrony Bank doesn't require a minimum balance or charge monthly fees.
• Not the best for long-term financial goals: While you'll earn interest on a high yield savings account, it may not be enough to keep up with inflation or hit long-term goals like saving for retirement.
• Fluctuating interest rate: Unlike with a CD account, the interest rate you receive in a high yield savings account is not set in stone. The interest rate can change at any time without notice.

MORE: Expert Advice on Why You Need a High Yield Savings Account

How High Yield Savings Accounts Work

Before you open an account, here are the basics about how high yield savings accounts work.

Withdrawals and Money Transfers

A high yield savings account can be linked to your checking account so you can easily transfer funds through your bank's mobile app or website. If you transfer between accounts at the same bank, funds are typically moved and available instantly.

If you need to access funds, you can transfer money to your linked checking account or withdraw cash through an ATM. However, some banks may limit you to a set number of withdrawals or transfers per month.

Understanding APY

When depositing money into a savings account, the bank pays you interest for keeping your funds with them. Annual percentage yield (APY) is a percentage indicating how much you may earn from your investment in a year at the current rate.

All you have to do is open an account and fund it, and you'll receive interest at the rate and time specified in your account agreement. 

The interest rate is generally what differentiates high yield savings accounts from standard savings accounts. Although there isn't a set percentage that's considered a "high" rate, getting an interest rate that exceeds the national average can make a big difference in your savings growth.

Compound Interest

Compound interest is a term for earnings on past interest earned. For example, if you earn $10 in interest in January, February's interest calculation includes that $10 you just earned. With compound interest, your earnings can accelerate over time.

How to Calculate Interest on a High Yield Savings Account

To find out how much you'll earn in interest through a high-interest account, you can calculate it yourself using this formula: Interest = P x R x N

• P is the principal amount
• R is the interest rate
• N is the time period (usually 1 is used to represent one year)

Say, for example, you have a high yield savings account with a $5,000 balance (P) and an interest rate of 0.60% (R) over one year (N).

Interest = $5,000 x 0.6% x 1, which equals $30 in interest.

You can also use our high yield savings calculator to see how much you could earn through Synchrony Bank.

What Is the Average Interest Rate for High Yield Savings Accounts?

The interest rate on high yield savings accounts varies by financial institution. The amount of interest often changes based on a target interest rate set by the Federal Reserve.

When the Fed increases rates, banks usually increase the rate they offer on their high yield savings accounts. When the Fed lowers, financial institutions usually follow suit.

High yield savings accounts often offer interest rates several times the national average. In some cases, you could earn far more than in traditional savings accounts.

How to Compare High Yield Savings Accounts

Are you debating between two or three different high-interest savings accounts? Here are some factors to keep in mind to help you choose the best account for you:

• Interest rates: The higher the annual percentage yield (APY), the more your account balance will grow. Paying close attention to interest rates, promotions and balance requirements is key to comparing high yield savings accounts.
• Fees: Compare the fees among banks and accounts. High fees can eat into your funds, diminishing the advantages of a high yield savings account. Some banks charge recurring monthly service fees if you don't meet certain requirements. Look for accounts that don't have any fees, like Synchrony Bank's high yield savings account.
• Customer service: Does the bank have good reviews? Do they offer chat support or alternative ways to connect? Make sure the bank you choose has good customer service so you can get the support you need if you have questions about your account.
• Minimum balance and initial deposit: Some banks require you to deposit a certain amount to open an account. You may also have to maintain a minimum threshold for the account to stay open or avoid fees. Synchrony Bank has no minimum deposit or minimum balance requirements for its high yield savings accounts.
• Compounding: The compounding rate is used to turn the account's simple interest rate into an APY. Whether the interest rates are compounded daily, weekly, monthly or yearly can have a big impact on how much interest you receive. The more frequently the money is compounded, the more you'll see your account balance grow. APY helps you compare accounts apples to apples, including compounding rates.

High Yield Savings Account vs. Money Market Account

Money market accounts and high yield savings accounts are both FDIC-insured and offer competitive interest rates, depending on the financial institution. However, there are some key differences between the two accounts.

Unlike high yield savings accounts, money market accounts typically come with check-writing abilities. Also, the interest rates offered in a money market account can be lower than the interest rates in a high yield savings account. If you need to access your funds using checks, a money market account might make more sense.

MORE: How Does a Money Market Account Work?

High Yield Savings Account vs. Certificate of Deposit

When you put funds in a CD account, funds are locked into the account until a future maturity date in exchange for a potentially higher interest rate. But with a high yield savings account, you can withdraw or transfer your funds whenever necessary.

A CD is a better option if you know you won't need your funds for a specific period of time. But if you need the flexibility to access your savings, a high yield savings account could be better. For savers who want to lock in their interest rate with the same FDIC insurance coverage as other savings accounts, a CD may be worth considering.

How to Open a High Yield Savings Account

A high yield savings account can be opened at any bank, credit union or financial institution offering it. With Synchrony Bank, you can open a high yield savings account online in minutes.

If you're already a Synchrony Bank customer, opening a new high yield savings account is easy. Just click the Open Account link, sign into your account and follow the steps to begin.

If you're new to Synchrony Bank, it's still easy to apply online. Your new account could be approved and opened within minutes. To open a new bank account, have the following details handy for a speedy and stress-free experience:

• Your name
• Your address
• Your Social Security number
• Copy of a government-issued ID (like a driver's license)
• Checking account information to set up the initial deposit

You may also be asked for information about your background, such as current and past employment, and any outstanding debt. As soon as you're set up, you can make an initial deposit, sit back and watch your funds grow.

Explore Synchrony Bank's High Yield Savings Account

With so many financial products on the market, it's important to find one that meets your goals. If you're looking to build your wealth but don't want to risk your funds in the stock market or keep the money locked up in a CD, a high yield savings account is a great place to start. And with more flexibility and higher yields than a standard savings account, it's a good option to consider as you plan your financial future.

LEARN MORE about Synchrony Bank's High Yield Savings account, and start saving for your future today.