When Should You Open a High Interest Savings Account?

High yield savings accounts can give you more income, but they're not for everyone.

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Savers have had a tough time over the past decade, because interest rates have been at rock-bottom levels for most of that time. It's been tough to get any interest at all from regular bank savings accounts, let alone the high yields that many savers rely on to produce the income they need to cover their living expenses.

Now, though, interest rates are on the uptick, and savers are finally starting to see signs of life in their accounts. If you want to have immediate access to your money instead of locking it up for months or even years in a certificate of deposit, a bank savings account often looks like the best choice. If, however, you want to maximize the amount of income your savings will generate, then special products known as high interest savings accounts or high yield savings accounts can be an even more attractive answer.

Before you jump into a high interest savings account, it's important to know the added requirements and restrictions that many banks put on their customers in exchange for giving them the highest interest rates available in the market.

The basics of high interest savings accounts

Traditionally, banks offered savings accounts as a way to allow their customers to earn modest amounts of interest while being able to access money at any time. Decades ago when banks first started offering modern-style accounts, banks weren't allowed to pay interest on checking account balances, and so savings accounts were the only option available to savers who didn't want to commit to the requirements of bank CDs to leave money on deposit for a fixed period of time or else face early withdrawal penalties.

As time went by, banks got smarter about how to appeal to different types of customers. Basic savings accounts were good options for many customers who didn't always have large amounts of savings to deposit with a bank. But banks also wanted to cultivate deeper relationships with their best customers, especially those who could afford to have extensive deposits with a favored financial institution. To accommodate those needs, banks came out with multiple tiers of savings accounts. High yield savings accounts catered to top clients with the most attractive rates, and banks were willing to pay high interest rates because these clients generated profits for them in other ways.

How high interest savings accounts compare to regular savings accounts

As the name suggests, high interest savings accounts generally offer higher interest rates than ordinary savings accounts. Banks set interest rates on all of their savings accounts on a regular basis, and there's no universal practice in determining how much higher a high yield savings account's interest rate will be than the rate for a regular savings account. In some cases, differences can be just a small fraction of a percentage point, while at other banks, you'll sometimes see boosts of a full percentage point or more.

Typically, there are different requirements that financial institutions will put on high interest savings account holders that are more onerous than what banks require of regular savings account holders. Often, there'll be a higher minimum balance that you have to maintain in your account in order to be eligible for the preferential interest rate. If you fall below that level, then you might have to pay a monthly fee. In some cases, banks charge higher monthly maintenance charges for high interest savings accounts. Your bank might waive the fee for you if you meet a given minimum account balance, but if you fall below it even temporarily, then you might have to pay the fee for that monthly account cycle.

In other cases, high interest savings accounts are reserved for bank customers who have more extensive relationships with the bank. For instance, if you have a mortgage loan through the bank, have a checking account, rent out a safe deposit box, or have CDs or brokerage accounts with the bank, then you might qualify for the higher interest rates that high yield savings account provide.

However, there are many things that high interest savings accounts have in common with regular savings accounts. Both are eligible for deposit insurance protection under the FDIC for regular banks or the NCUA for credit unions. Total deposits in any one bank are covered up to $250,000 according to current limits. Banks also make most of the same perks available to all of their savings account holders, including debit card and ATM access.

Should you go with your local branch or an online bank?

If you decide that a high interest savings account makes sense, another issue is whether you should go with an online bank or stick with a local bank branch. The advantage of staying with a traditional local bank is that you can get personalized service whenever you want, with people you know and can talk to in person. Especially if you intend to have a close banking relationship, physical presence can mean a lot.

However, online banks will often pay higher interest rates on high yield savings accounts than traditional banks, because they can afford to take their cost advantages and pass them through to customers. Without the expenses of building and maintaining bank branches, online banks can afford to offer top rates. However, you have to be comfortable with the online interface and not being able to visit a branch location in order for online banks to work well for you.

When is a high interest savings account the right choice?

In general, if you have an opportunity to open a high interest savings account, it's the right move if the advantages outweigh the disadvantages. In particular, consider the following questions:

  • Do you have enough money to meet minimums and avoid extra fees? If not, then you have to do the math to see whether the extra interest you collect will be worth the fees you have to pay. Most of the time, minimum balances are set low enough that the interest bump won't be enough to offset extra fees.
  • Are there other advantages your bank will offer if you have a high interest savings account? With some financial institutions, having a high interest savings account will let your banker cross-sell you other banking products at favorable rates or costs. See if opening the high interest savings account gives you access to a special relationship banking package.
  • Do you really need immediate access to all of your money? Despite the higher rates that high yield savings accounts pay, CDs can pay even more at some banks. If you can afford to lock up some of your money for a longer period of time, then you might be able to get even more interest.

Savers are finally earning substantial amounts of interest again, and the right type of savings account can play a big role in boosting your income as much as possible. With a high interest savings account, you can ensure you earn the most from your bank savings and get whatever additional perks your bank provides to its most valuable customers.