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High-yield savings accounts: 7 myths busted

High-yield savings accounts are a safe, simple way to grow your savings. Here’s what you need to know.

Some high-yield savings accounts now offer an APY that tops 4% — about 1,600 higher than the interest rate on traditional savings accounts.

Some high-yield savings accounts now offer an APY that tops 4% — about 1,600 higher than the interest rate on traditional savings accounts.

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One silver lining of the Fed’s historic string of interest rate hikes over the past year: Americans are earning more interest on their savings than they have in 15 years. 

Some high-yield savings accounts now offer an APY that tops 4% — about 1,600 higher than the interest rate on traditional savings accounts. The average savings account interest rate overall still sits at 0.23%, according to a March 22 survey of institutions by Bankrate. Many big banks drag down the nationwide average by continuing to offer meager earnings on savings accounts. A Wall Street Journal analysis found that if Americans moved their deposits from the five biggest banks to the five providers with the highest-yielding savings accounts in the third quarter of last year, they could have earned an astounding $42 billion in additional interest. 

But many Americans are hesitant to make the change, especially since it typically involves switching from a brick-and-mortar bank to an online bank, which is why we’ve set out to dispel the myths about high-yield savings accounts that may be preventing people from making informed financial decisions. Here’s what you need to know about how high-yield savings accounts work, so you can maximize your savings with confidence. 

7 myths about high-yield savings accounts

Money won’t grow in a savings account

Money always grows in a savings account — it’s just a matter of how much. If you have a small emergency fund in a traditional savings account, the growth may not be that meaningful. That’s why you should focus on increasing your contributions to a high-yield savings account. 

Let's say you deposit $10,000 in a savings account. If you choose a traditional savings account with an average savings rate, you’ll only earn $23 in a year. But if you choose a high-yield savings account with 4% APY, you’ll rack up $400 in extra savings. 

It’s risky to keep your money in a savings account

Some people don’t trust banks and would rather keep their money under their mattress — but the risk of theft makes this solution less safe. It’s also less profitable, since your mattress doesn’t pay interest. As long as the account you choose is fully insured by the FDIC or NCUA, your money will be secure. Legally, the FDIC and NCUA must guarantee up to $250,000 for each depositor at each bank or credit union. However, some financial service providers offer even greater protection by holding deposits for an account holder at multiple banks. 

APY is the most important factor when choosing an account

Not always. While interest rates are an important factor to consider when choosing an account, you should also pay attention to any maintenance fees, minimum balance requirements, and access limitations, while making sure the account will be fully insured by the FDIC or NCUA. Certain accounts may also have convenience features, like a mobile app or free ATM access, that may be important to you. 

Most high-yield savings accounts don’t have fees or minimum balance requirements, which can be another way they help you save more money than you would at a traditional bank. If you’ll need to access your money regularly, choose an account with unlimited withdrawals. You should also choose an account with a manageable minimum opening deposit. 

High-yield savings account rates are fixed

Interest rates on high-yield savings accounts are variable, which means they go up and down based on a number of factors. Although the Federal Reserve doesn’t set interest rates on savings accounts, its actions influence them. During a weak economy, the Fed lowers interest rates to encourage borrowing, and financial institutions respond by decreasing the APY they offer on savings accounts. When inflation is running high, the Fed raises interest rates to discourage economic activity. This allows financial institutions to raise the APY offered to savings account holders. 

The Fed has indicated it may raise interest rates one more time this year in its attempt to reach its target inflation rate. As a result, interest rates on high-yield savings accounts will likely stay elevated for the foreseeable future. If you do want to lock in your rate, consider a certificate of deposit (CD), which maintains the same interest rate for the term, which typically ranges from three months to five years. Some CD rates are topping 5% these days, so they’re another great vehicle for growing your savings.

You’ll get the best rate from your current bank

Some people mistakenly believe they’ll get a better rate if they open a savings account at a financial institution that they have an established relationship with. It’s an understandable assumption — but it’s not the case. Online banks typically offer better high-yield savings account rates than brick-and-mortar banks. While it’s worthwhile to keep your checking account at an institution with branches you can visit to deposit cash, you’ll likely earn more interest if you choose an online institution for your high-yield savings account. 

You need a lot of money to open one

Some people don’t think they don’t earn enough to save, or that they need a large deposit to open an account. While every high-yield savings account is different, some don’t require a minimum deposit. You can open an account with pocket change, as long as you meet the other requirements. (You’ll typically need to have another banking account, like a checking account, to fund your high-yield savings account.) 

Even if you can only put away a few dollars every week, you’ll reduce your chances of financial hardship by building a nest egg. Luckily, most high-yield savings accounts don’t have minimum balance requirements, so you can take your time saving. 

Your money will be harder to access

Some high-yield savings accounts offer unlimited withdrawals, while others may cap the number of transactions within a given time period. Even so, they’re not nearly as restrictive as some other types of savings accounts, such as certificates of deposit. (Bear in mind that each financial institution will have its own processing times for withdrawals.)

While your goal should be to leave your savings untouched, you shouldn’t shy away from a high-yield savings account because you’re afraid you may need the money. Just make sure to choose an account that meets your needs. 

Bottom line

Whether you’re preparing for a potential recession, saving for a vacation, or trying to give yourself a safety net during financial emergencies, a high-yield savings account will help you accomplish your goals. 

If you’re wondering when to open a high-yield savings account, there’s no time like the present — APYs are high, and the earlier you get started, the more time your money will have to grow. Most high-yield savings accounts allow for automatic deposits, so you can save a portion of your paycheck before you spend it. If you stick to a budget and take advantage of today’s great rates, you may reach your financial goals faster than you think. 

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.