A high-yield savings account is a must-have for people wanting to build wealth and an emergency fund simultaneously. But which is the best? I will be going over the top five high-yield savings accounts for you.
Click to jump to a section:
- What is a High-Yield Savings Account?
- High-Yield vs. Traditional Savings Account
- Why Should You Have One?
- The 5 Best High-Yield Savings Accounts
What is a High-Yield Savings Account?
A high-yield savings account is just as it sounds – a savings account that offers a high yield. Usually, high-yield savings accounts are provided by third parties instead of big banks.
The yield of a savings account is the percent return you earn annually. For most savings accounts, this number is well below one. Due to currently low interest rates, savings account yields are as low as 0.01%. Don’t expect this number to climb above a couple of percentage points.
A high-yield savings account offers a yield closer to 3-4%. That is a 300-400x higher yield!
Other than this yield, think of a high-yield savings account as an online savings account. You can access it just the same as any other account.
High-Yield vs. Traditional Savings Account
Higher Yield
The first obvious difference is, of course, the higher yield. Expect this number to be hundreds of times higher in a high-yield account vs. a standard one.
Most high-yield accounts offer a yield somewhere between 3-4%.
If you saved $10,000 in a traditional savings account, you would earn around $1 in an entire year. If you saved that money in a high-yield account, you would make up to $400 in the same period. All just from your money sitting in a different kind of savings account.
Companies that Offer Them
Most traditional brick-and-mortar banks don’t offer a high-yield savings account. Though some companies like Capital One are starting to get on board.
The reason most banks don’t offer them is that it cuts into their profits.
Banks make money by loaning out the money you give them and earning interest on those loans. Often, this is a loan to the government in the form of bonds or debt buyouts. These forms of loans offer a return of around 4-5%.
If the bank gives you 0.01% of those profits, they stand to keep nearly all of it. However, they would lose almost all that interest if they offered you a high-yield savings account.
On the other hand, a company offering a high-yield savings account is not planning to make much money off your savings. Instead, these savings accounts are just a way to get users into their ecosystem. They make money off loans such as student loans and fees on their managed funds.
Why Should You Have a High-Yield Savings Account
No Risk
At My Money Marathon, we are all about building wealth. However, this almost always involves some risk.
You never know for sure how the stock market will behave. You can’t predict what could happen to the housing market or even your house.
This risk is usually worth it, but it means that these investments can’t be used as a reliable form of savings. It is never a good idea to depend on money that could fluctuate at a moment’s notice.
On the other hand, a high-yield savings account offers a guaranteed return.
You can depend on the future of a high-yield savings account. You can guarantee that it will increase by the set return rate. It is out of the question that the funds will never decrease on their own.
This means high-yield savings accounts are one of the few investments you can bet on using soon for a big purchase. A high-yield savings account can be used to save for a down payment, for example, without worrying about it disappearing when you need it.
Liquidity
Liquidity measures how quickly funds can be accessed and used for purchase. Think of cash as perfectly liquid since it is immediately available. On the other hand, a house is very illiquid because you have to go through the selling process to get the funds.
The vast majority of investments have mediocre or horrible liquidity. The stock market is mediocre because you must sell your assets and wait for the funds to settle before withdrawing. Retirement accounts like 401Ks have horrible liquidity since the withdrawals have high fees until 59 ½.
Bonds are the closest analogy to high-yield savings accounts when it comes to returns. Bonds have guaranteed returns, just like high-yield savings accounts. However, bonds lock up your funds for six months to several years.
High-yield savings accounts offer excellent liquidity. Since they act just like a savings account, funds can be transferred and accessible within a couple of business days. This may not be instantaneous, but it is fast enough for most situations.
If you want even higher liquidity, companies like SoFi offer checking accounts with lower returns such as 1.75%. It may be a lower return, but funds are available immediately through a debit card.
Insured
The last point for high-yield savings accounts goes to insurance. Any funds in a high-yield savings account for FDIC insured up to $250,000.
This is the same policy as a brokerage or standard bank account. However, this is a huge step up if you are used to saving in cash.
The 5 Best High-Yield Savings Accounts
1. SoFi
Return: 4% on savings and 2.50% on checking
Fees: None
Minimum Balance: None
SoFi is an easy-to-use, easy-to-open high-yield savings account.
SoFi offers returns through checking accounts in addition to savings accounts. That gives you great flexibility to earn a solid return on all your money—even money you plan to use soon.
Just make sure to set up direct deposit to earn the highest return possible. This is also a great way to automate your savings. You will never forget to save when it is automatically deducted from your paycheck.
Since SoFi doesn’t require minimum funds to open or keep open, making it very accessible.
I have personally been using SoFi and would highly recommend it. I have moved money in and out of the account with no issues. Interest compounds monthly.
If you sign up for SoFi, sign up through my link to get $25 when you deposit at least $10. SoFi does not sponsor my Money Marathon; this is just a referral link.
2. Ally Bank
Return: 3.4%
Fees: None
Minimum Balance: None
Ally is another excellent option for a high-yield savings account.
They are highly recommended by the group over at the Investing for Beginners Podcast. They love it for its ease of use and a solid return. If you are looking for an investing brokerage, Ally is a great option.
Ally also offers a checking account, though its return is only 0.1%. Though this is far lower than their savings rate, it is still 10x higher than most checking accounts. If you need a debit card, it’s better to earn that return than not.
With no fees or minimum balance, you can’t go wrong with Ally.
3. Capital One
Return: 3.4%
Fees: None
Minimum Balance: None
Capital One is a well-known credit card company, so you know you can trust them.
Capital One has a fantastic interface and makes transferring funds straightforward.
This is even more attractive if you already bank with Capital One through a credit card or other account. Banking with one bank makes it much easier to keep track of your finances. You don’t have to jump from account to account to check in or move funds.
Capital One offers a nice feature of splitting your savings account. Each of these smaller accounts can then target a specific goal. For example, breaking your savings into one account for long-term savings and another for a down payment on a car.
Return: 3.5%
Fees: None
Minimum Balance: None
You have likely heard of Discover regarding their credit cards. Many people use and trust them. That’s a good sign for the discover savings account.
If you have a lot of savings to transfer, you can earn a bonus. A $15,000 deposit earns you $150, and a $25,000 deposit earns you $200. Not much, but worth taking advantage of if you transfer an entire savings account.
5. Citi Bank
Return: 3.85%
Fees: $4.50 monthly if below $500
Minimum Balance: None
Citi Bank is another reputable name in the banking space. Their high-yield savings account offers a fantastic return of 3.85%.
The reason for Citi being so on this list is their fee structure. It’s nothing crazy, but it’s a bit of a headache compared to no fees.
If your balance drops below $500, you are charged a fee of $4.50 per month. In many ways, this means $500 of your balance is locked up unless you want to close that account entirely. That makes using this account to save for large purchases soon questionable.
Though this fee isn’t horrible, other options are discussed above with nearly the same return and no fees. My Money Marathon recommends taking the peace of mind and sticking with no fees.
Summary
A high-yield savings account is a must-have for anyone trying to build wealth. There is no other form of saving that will earn you this return and no form of investing that will be this guaranteed and liquid.
Which account you go with will primarily affect the return you earn. All the above accounts make a solid return, so go with a company you trust.
Companies can change their policies anytime, so read the terms and conditions before signing up. The main thing to look out for is fees. They will usually occur when withdrawing or having a low balance.
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