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How To Save Money With A High Interest Savings Account

Jerry Brown9-minute read
March 23, 2022

Whether your goal is to save money for a down payment on a home, build an emergency fund or set aside money for some other future expense, having a savings account is essential. It’s a safe place to store and grow your money. But not all savings accounts are created equal. Using a high-interest savings account versus a traditional savings account can help you achieve your financial goals faster.

What Is A High-Interest Savings Account?

A high-interest savings account is one that earns more interest than a traditional savings account. For example, most recent data from the FDIC shows that the average interest rate on savings accounts has been .05% for the past year.

By contrast, high-interest savings accounts offer a return of 10 – 20 times more. Although these higher interest rates can be found at both brick-and-mortar and internet-only banks, you're more likely to find them at the latter option. That’s because banks that have an online-only business model have less overhead expenses. One of the downsides of this is that you’ll most likely have to hold accounts at different banking institutions. For example, if an online bank doesn’t offer a checking account option, you’d have to use a separate institution, which could make transferring money less intuitive.

Like traditional savings accounts, your funds are protected up to $250,000 if the banking institution is FDIC insured. Before you create an account, make sure to look for FDIC membership information on the bank's website or the FDIC sign if you’re visiting a physical branch. If you’re unsure whether a bank is FDIC insured, used the search tool on the FDIC’s website.

The money you deposit in a high-interest savings account is best used for short- and long-term financial goals. Some of those goals include creating an emergency fund, saving for a down payment or a fun vacation.

Since it’s not designed for everyday spending like a checking account, most savings accounts do not offer ATM cards. Left untouched, the money you deposit into the account is free to grow, so it’s best to refrain from making withdrawals. But if you really need to use the money, you can wire transfer funds from your savings to your checking account.

How Do High-Interest Savings Accounts Work?

Most high-interest savings accounts come from internet-only banks. Because these banks are internet-only, they don’t have to pay for things like physical buildings, maintenance for those buildings and the banking staff that keeps the branch running.

Because of this, internet banks are usually able to pass those savings off to their customers in the form of lower banking fees and higher interest rates.

Although those are huge benefits, there are cons. Some of the potential cons include:

  • Not being able to deposit cash when using some internet-only banks
  • Lack of face-to-face help from staff
  • Having to maintain accounts at multiple banks for your needs

To see if the pros of opening a high-yield savings account versus a traditional outweigh the cons, you need to do the math. For example, let’s say you have $50,000 in a traditional savings with an APY of 0.05%. In one year, you’d earn a grand total of $14.17 in interest. However, if you moved your funds to a high-interest savings account with an APY of 1.05%, you’d earn $298.49 in interest. That’s a total difference of $284.32.

Over time, if the interest rates remained higher, you’d earn thousands of dollars more than you would with a traditional savings account.

Does that excite you? If so, continue reading to find out what to look for in a high-yield savings account. 

High Annual Percentage Yield (APY)

Annual percentage yield is a number that tells you exactly how much you can earn from your savings in 1 year. Since it factors in how often your money compounds, it gives you a more accurate estimate of how much money you can earn from your savings. It’s the most attractive draw for high-yield savings accounts because customers want to earn the most interest possible from their savings accounts.

When you’re researching high-interest savings accounts, you should choose the lender that has the highest APY you qualify for. The higher the APY, the more you’ll earn in interest.

Interest Rates

Unlike APY, the interest rate on your savings account doesn’t take compound interest into consideration. Since it doesn’t take into account compound interest, it’s lower than the APY. For example, let’s say you chose to open a savings account with an initial balance of $20,000 that has a 2.5% interest rate that compounds daily for a year. To keep things simple, let’s pretend you didn’t add any more contributions throughout the year.

If you entered this information into an APY calculator, you’d get a result of 2.53%. Your final balance would be $20.506.28. By contrast, if you calculated the interest rate without compounding, your result would be $20,500.

However, since the interest rate on savings accounts often vary, it’s hard to calculate the exact amount you’d earn in the real world. Interest rates fluctuate based on a number of factors, one being how well the economy is doing. Most recently, a lot of banks dropped their rates after the Federal Reserve cut the federal funds rate. In 2019, some internet-only banks had rates as high as 2.25%, but now those rates have been cut in half.

Minimum Deposit Requirement

When choosing a high-interest savings account, you should be aware of the bank’s minimum deposit requirement. This is important because if you don’t have the minimum deposit, you won’t be able to open the account. Some lending institutions don’t have a minimum deposit requirement, while some can require $2,500 or more to open the account.

The best minimum deposit requirement depends on your unique financial circumstances. If you can afford to deposit a large amount and the interest rate is one you desire, open the high-yield savings account. However, if you can’t afford the deposit, choose a bank that has a lower minimum deposit requirement. Also, keep in mind how much money you need to keep in your checking account for everyday expenses. Moving the money soon after depositing would prevent your savings from growing.

Alternatively, you could save up the minimum deposit requirement over time. That way you could qualify to open a savings account with your preferred lending institution.

Minimum Balance Requirement

In addition to minimum deposit requirements, some banks have minimum balance requirements, which require you to keep a certain amount of money in your account. This balance can be a daily minimum or monthly average. Typically, if you maintain the minimum balance requirement, banks that have monthly maintenance fees will allow you to waive them. Some banks have no minimum balance or monthly maintenance fees.

For the banks that do have minimum balance requirements, they typically range from $100 – $500. Higher minimum balance requirements exist, but they’re less common.

To give you an incentive to maintain a high balance, some banks will only award you a higher interest rate if you maintain the minimum balance. Also, some banks offer a cash bonus reward for maintaining a high balance. For example, one online bank offers a bonus of $700 if you maintain a minimum balance of $50,000 for a 60-day period.

While this bonus is nice, you might not have that much money to deposit into a savings account. In that case, choose the account where you can easily afford to maintain the balance required or one that has none. Doing so could help you avoid monthly maintenance fees that reduce your earnings.

Withdrawal Options

For savings accounts, withdrawal frequency is usually limited. In order to take money from these accounts, you usually have to make the withdrawal at the bank in person or transfer it to a checking account. Historically, under federal law, Regulation D has limited savings account withdrawals and transfers to 6 per month. However, due to COVID-19, the law has been amended to let banks decide whether to suspend enforcement of the rule.

Since it’s up to your bank, you’ll have to contact them to see whether this rule still applies. If it does and you exceed the maximum number of withdrawals, you can incur withdrawal fees. In addition, banks have the power to decide whether to close your account or convert it to a checking account if you make excessive withdrawals.

What Are High Interest Savings Accounts Best Used For?

The main difference between checking and traditional savings accounts when compared with high-interest savings accounts is that the latter can allow you to save for your goals faster. A checking account is generally used for everyday expenses. While a traditional savings account operates like a high-interest account, it doesn’t offer as high of an interest rate.With that being said, high-yield savings accounts are best used for the following scenarios: 

  • Emergency fund
  • Weddings
  • Gig worker’s self-employment tax fund
  • Down payment on a home
  • College fund
  • Moving funds

Although the amount you need to save for each goal above depends on your personal situation, let’s see how a savings plan would work for each scenario, based on a 1.05% APY.

Emergency Fund

In the first scenario, imagine that a couple wants to build an emergency fund. Their living expenses total $3,000 a month and they want to create a 6-month emergency fund within a year. That means they’ll need to save $18,000.To meet their goal, they’ll need to make monthly deposits into a high-yield savings account totaling $1,492.50. During that 12-month period, the interest earned on their account would be $89.10.

Wedding Expenses

For another example, pretend a couple is saving for wedding expenses of $5,000 due in 6 months. In order to reach their goal, they’d need to save approximately $831.40 each month and would earn $11.62 in interest on their balance. 

Self-Employment Tax

High-interest savings accounts can also be used to create a gig worker’s self-employment tax fund. For example, if a gig worker needs to save $3000 in 3 months to pay for quarterly taxes, they’d need to save around $996 each month and would earn $15 in interest.

Down Payment

Another common use of these bank accounts is setting aside money for a down payment on a home. Imagine that someone wants to put 20% down on a $100,000 home to avoid private mortgage insurance and they want to save over a 3-year period. For this to work, they would need to put $20,000 down on the home. They’d need to save about $496.26 monthly and would earn $278.46 in interest.

College Tuition

For our next example, let’s assume Mary is saving for her son’s college fund. Since he won’t be attending college for another 10 years, this is a medium-term goal for her. She estimates that his education will cost $100,000. In order to reach her goal, she’d need to contribute $784.60 each month to her savings account and would earn a total of $5,848.17 in interest.

Moving Expenses

Finally, let’s pretend a couple needs to save up $5,000 to move to a new city in 8 months. In order to save, they would need to set aside $623 a month and would earn $16.03 in interest.

The Best High-Interest Savings Account

The best high-interest savings account is one that will allow you to save for your financial goals and earn the most interest, without incurring any fees. Because this depends on your unique financial circumstances, the answer varies.

Although it’s a good idea to pick the bank account that has the highest interest rate, it usually comes with a higher minimum deposit or minimum balance requirement.

Before making a final decision, review your finances to see how much you need to keep in your checking each month. You want to avoid having to transfer money from your savings to your checking account too often to cover everyday expenses. The best savings account for you is one that’ll allow you to use it for what it was designed for – to save and store money.

Also, if you’re worried about not being able to connect accounts from different lenders, don’t let this deter you from opening up a high-interest savings account. It’s usually relatively easy to connect bank accounts from different lenders.

How To Open A High-Interest Savings Account

To open a high-interest savings account, try reaching out to your current banking institution first to see if they have an option available. If they do, you can fill out an application online or in person if you’re using a physical branch.

For the online application, you’ll most likely need to provide the following items:

 

  • Social Security number or tax identification number
  • Your legal name
  • Address
  • Annual income
  • Birthdate

The application process usually doesn’t take that long. For example, it takes less than 10 minutes to fill out Ally Bank’s high-interest savings account application. Once that’s done and you’re approved, you can transfer the required minimum deposit (if there is one).

To open a new bank in person, you’d need to provide similar information, along with other documents, such as:

 

  • Proof of identification
  • Proof of address

Before visiting, reach out to the banking institution to see what documentation is required. Different banks usually have different requirements. The bank’s personal banker will help you set up your new high-yield savings account.

Summary

If your goal is to earn more interest on your savings, using a high-interest savings account is one of the best ways to accomplish this. When choosing one, pay special attention to minimum balance requirements, withdrawal limits and minimum deposit requirements. Doing so can help you avoid unnecessary fees.

Also, don’t forget to compare interest rates and annual percentage yields.

Once you find the bank account that’s right for you, consider moving the majority of your savings to the new account so that you can earn more interest. In order to maximize your savings even further, decide whether closing your old savings account is a good idea.

Finally, create a savings plan for your account. If you need to save for a short-term savings goal, such as a wedding or vacation, figure out how much you need to save each month. Use our savings calculator if you need help deciding how much money you need to save monthly. Once you determine that, you can set up automatic transfers from your checking to your new savings account to fund your savings goals.

Jerry Brown

Jerry Brown is a personal finance writer based in Baton Rouge, La. He's been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages. Jerry was nominated for a Plutus award for best social media for personal finance in 2020.