how does a savings account work with interest

You can view all savings interest rates online. Visit our Bank of America Advantage Savings product page for the current rates. How do I apply for a savings. What is a savings account, and how does it work? A savings account is an interest-bearing account that helps you save money and earn monthly interest. myRewards Savings is a savings account with interest to help you save for This 60-day grace period does not apply to existing or converted accounts.

: How does a savings account work with interest

How does a savings account work with interest
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How does a savings account work with interest
How does a savings account work with interest

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What Is a High-Yield Savings Account?

A high-yield savings account is a type of savings account that typically pays 20 to 25 times the national average of a standard savings account. Traditionally, people have held a savings account at the same bank where they hold their checking account, making transfers between the two easy and quick. But with the advent of internet-only banks, as well as traditional banks that have opened their doors to customers across the country using online account opening, the competition on savings rates has skyrocketed, creating a new category of "high-yield savings accounts."

Given the difference between high-yield savings account rates and the national average, the increase in earnings is significant. If you're holding $5,000 in savings, for instance, and the national average is 0.10 percent APY, you would return just $5 over the course of a year. If you instead put that same $5,000 in an account earning 2 percent, you'd earn $100.

Key Takeaways

  • The interest rates on high-yield savings accounts can be 20 to 25 times higher than what traditional savings accounts offer.
  • You may be able to open a high-yield savings account where you already bank but the highest rates are often available only from online banks.
  • Electronic transfers are easy to set up between a high-yield savings account and your checking account even if you hold them at different banks.
  • As you consider different high-yield savings account options, weigh factors such as initial deposit requirements, interest rates, minimum balance requirements, and any possible account fees.

The trade-off to earning significantly more is that you may need to hold your savings account at one institution and your checking account at another. While this may initially how does a savings account work with interest awkward if you're used to both accounts being held at one bank, today's availability of electronic transfers between institutions—and the speed at which those transfers can be executed—make moving money between your checking account at Bank A and your savings account at Bank B a relatively simple matter.

You may also find that, unlike traditional brick-and-mortar institutions that offer a one-stop shop for all your banking needs, the institutions offering high-yield savings accounts typically limit their features or offer few or no other products. Many don't offer checking accounts and few provide ATM cards, requiring all inflows and outflows to the savings account to occur by electronic bank transfer or mobile check deposit if it's available.

But rest assured that one important feature how does a savings account work with interest the same between traditional savings accounts and their high-yield counterparts: the federal insurance you're provided against bank failures from the Federal Deposit Insurance Corporation (FDIC) and credit union failures from the National Credit Union Association (NCUA). Whenever you're considering opening an account at a new institution, simply check that it is an FDIC how does a savings account work with interest NCUA member.

You'll also find that the federal regulation limiting withdrawals from a savings account to six per monthly cycle will be in effect on any kind of bank savings account, whether it's a how does a savings account work with interest or a high-yield account. Given all this, it's worth learning how to find and open a high-yield account and considering whether it would be worth adding one to your financial portfolio.

Deciding How You'll Use a High-Yield Savings Account

A high-yield savings account should, of course, make up only a part of your overall financial portfolio. Consider how you'll best how does a savings account work with interest the account to complement your other savings and investment strategies and from there determine how much cash you think is prudent to keep liquid for your particular situation.

For instance, is the savings account meant to serve as an emergency fund? In how does a savings account work with interest case, financial experts typically recommend having three to six months' worth of living expenses on hand.

Perhaps instead you're using a high-yield account to save up for a large purchase, such as a house, a car, or a big vacation, which you'll make within the next five years. On that time horizon, it's best not to put the funds into investments that could lose their value. So periodically socking funds away in a high-paying savings evan moor corp worksheets answer key can help you protect your principal while applying interest earnings to your savings goal.

Still others will open a high-yield savings account not for a specific purpose but simply to house surplus cash that they sweep out of their checking account. Since checking how does a savings account work with interest rates are generally minuscule or zero, moving extra funds into savings when you don't need how does a savings account work with interest to cover day-to-day transactions can provide a monthly interest payment you wouldn't otherwise earn.

Of course, more than one of these options can be employed to segregate your savings for simultaneous uses or goals. Many institutions allow you to open more than one savings account and even give them personalized nicknames (e.g., Car Fund, Vacation 2020, etc.). Or you can open a high-yield savings account at more than one top-paying institution. Multiple savings accounts can facilitate easy tracking of your progress toward goals and make it simpler to keep your hands off money you don't want to touch, such as your emergency fund.

What to Look for in a High-Yield Savings Account

Whether you're shopping for a high-yield account at a new institution—or are lucky enough to have one on offer at your current bank—it's always wise to compare options across the marketplace. Differences in interest rates and fees can add up over time, especially if you're keeping a relatively large balance in savings. Here's what to look for chase customer service number 1800 compare:

1. Interest Rate

How much interest does the account currently pay? Is it a standard rate or an introductory promotional rate? Savings account rates are generally flexible and can be changed at any time. But some accounts will specify that the currently advertised rate is only available for an initial period of time. Another factor to look for is whether there are minimum or maximum balance thresholds for earning the promoted rate.

2. Required Initial Deposit

How much money is required to open the account and are you comfortable depositing that much at the outset?

3. Minimum Balance Required

How much money are you required to keep in the account going forward? You'll want to feel comfortable with always meeting the industrial real estate for sale near me threshold because falling below it can incur fees or invalidate the interest rate you're expecting.

4. Fees

Does the bank or credit union charge any fees on this account? If so, what are the ways you can avoid it (e.g., always keeping your balance above the minimum threshold)? Also, if you exceed the federally mandated limit of six withdrawals per month, what is the bank's fee for the violation?

5. Links to Other Banks and/or Brokerage Accounts

Will the bank allow you to create links between your high-yield savings account and deposit accounts you hold at other banks or brokerages? Are there restrictions on linking multiple accounts or a waiting period for new accounts during which you cannot change your initial linked account?

6. Accessing Your Money

What additional options, if any, are available for withdrawing funds? Can you withdraw funds from savings using an ATM card?

7. Deposit Options

If first citizens digital banking online login expect you'll want to deposit checks into the account, does the bank have a smartphone app that offers mobile check deposit? Otherwise, will you be able to mail in checks or deposit them by ATM?

8. Compounding Method

Banks can stipulate that interest will be compounded daily, monthly, quarterly, semiannually, or annually. While more frequent compounding will theoretically increase your take-home yield, if you stick to comparing accounts by APY instead of annual interest rate, the compounding factor will already have been taken into account.

How to Open a High-Yield Savings Account

If you're lucky enough to how much money the average american has in savings a competitive high-yield savings account available at your current bank, opening the new account will be a breeze. It will likely be possible through your online banking portal with little need to enter personal information since you will already be verified with the institution.

If you're all about rentals morganton north carolina a savings account at an institution that is new to you, the process will be more involved, though none of it will prove overly complicated. Almost all high-yield savings accounts can be opened online, so you'll want to set aside 15 minutes or so when you can fill in the electronic application on your computer. You'll also want to have your driver's license, Social Security Number, and primary bank account information at hand to facilitate the application process.

Where can a consumer find a high-yield savings account?

Online banks are offering the highest rates. Still, you may be able to open a high-yield savings account where you already bank.

What are the main things to look at in a high-yield account?

Read up on and compare factors such as initial deposit requirements, interest rates, minimum balance requirements, fees, links to other banks and/or brokerage accounts, access to your money, deposit options and compounding method.

The Bottom Line 

A high-yield savings account can be a useful middle ground for your money, offering protection of your principal, the safety of federal insurance, and a yield that's higher than a regular savings account though less than you could potentially earn from riskier investments. Just be sure to think through how one or more high-yield accounts can best serve your financial goals and situation. Then, do your homework to find an account that will maximize your earnings at the same time that it lets you avoid fees without imposing restrictions that don't fit your needs.

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy .

  1. FDIC. "Weekly National Rates and Rate Caps - Weekly Update." Accessed Oct. 8, 2021.

  2. National Credit Union Association. "How Your Accounts Are Federally Insured," Pages 1-2. Accessed Oct. 8, 2021.

  3. Federal Deposit Insurance Corporation. "Insured or Not Insured?" Accessed Oct. 8, 2021.

  4. Federal Reserve. "Regulation D1 Reserve Requirements." Accessed Oct. 8, 2021.


How Does Savings Account Interest Work?

How Does Savings Account Interest Work?

Savings Account Interest Overview

Financial institutions pay individual depositors interest on money deposited in savings accounts. They pay interest because you are allowing the financial institution to use your money to make loans to others. Interest rates paid on savings accounts to individual depositors are generally less than interest rates charged to those borrowing money. However, interest rates may vary considerably depending on the type of financial institution where the money is deposited. If you have a large sum to deposit, you may want to consider calling around to find the best interest rates. In addition, the type of savings account where the money is deposited affects the interest earned. Some savings accounts earn simple interest and others earn interest compounded daily.

Simple Interest

Financial institutions pay interest based on a percentage of your savings account balance. The interest is usually calculated and paid to depositors every three months, which is quarterly. You can figure simple interest in a few easy calculations: Savings account balance times the interest rate, divided by four. You divide by four because the interest is paid quarterly, or four times a year. If the interest were paid monthly, you would divide by 12 because there are 12 months in a year. Here is an example of a quarterly interest payment. Say you have $1,000 in a savings account at two percent interest paid quarterly. The equation would be ($1,000 x .02)/4=$5. You would earn $5 in interest after the first quarter. During the second quarter, you would earn interest on $1,005 if you did not deposit or withdraw any money. The equation would be ($1,005 x .02)/4=$5.03, and the new balance in the savings account would be $1010.03. Each quarter the savings account balance would increase as interest is added to the first calgary financial online banking login members Interest Compounded Daily

Individuals earn more interest over time from a savings account that compounds interest daily than from a savings account that pays simple interest. The equation to calculate the interest is the almost the same. Use 365 instead of four, because there are 365 days in a year and the interest is compounded daily. To calculate one year of savings account interest you would need to make 365 separate calculations instead of four calculations. Therefore, most people use an interest calculator to figure compound interest (see Resources below). The equation would be ($1,000 x .02)/365=$0.06. You would earn $0.06 in interest after the first day. The second day, you would earn interest on $1000.06 if you did not deposit or withdraw any money. Of course, the difference will be more significant with larger savings account balances. These banks usually pay the interest into the savings account once a month.


What a high-yield savings account is and how it can grow your money

Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

Editor's Note: APYs listed in this article are up-to-date as of the time of publication. They may fluctuate (up or down) as the Fed rate changes. CNBC will update as changes are made public.

If you have a checking account at your local bank, you likely have a savings account there as well.

Many people store their money how does a savings account work with interest a savings account to earn interest and watch their money grow over time. But some savings accounts offer a much higher return than others  — which is where high-yield savings accounts come into play.

While the national average return on a traditional savings account is just 0.06%, a high-yield savings account applies a much higher interest earnings to your savings.  

For this reason, people store their cash in a high-yield savings account to reach their goals more quickly — whether it's saving up for something in the short term, like a vacation, or planning to make a large expense down the road, such as a down payment on a home.

Below, CNBC Select takes a look at what high-yield savings accounts are and how they work.

What are high yield savings accounts?

High-yield savings accounts stand out from traditional savings accounts in that they reward you with a higher interest rate, allowing your money to grow even faster as it sits in your account. 

The interest rate that these accounts offer is noted as APY, or annual percentage yield. The higher your APY on a particular savings account, the faster your money grows.

It's important to note, however, that the APY that savings accounts offer when you sign up can change at any time. These rates are variable and often go up or down in accordance with the Federal Reserve changing its benchmark interest rate.

Though the current economic climate has caused savings rates to drop as of lately, the highest-yielding accounts can still earn you over 16X more money than regular savings accounts. With the national average APY on savings accounts at just 0.06%, it's very likely that no matter what your high-yield account offers, it will still outearn a normal savings account. And as the economy recovers and the Fed later raises interest rates back up, APYs on savings account will follow suit.

Not only does your money earn a better return in a high-yield savings account, but you still have access to your cash when you need it as you would in a normal savings account.Your money in a high-yield savings account should be federally insured by the Federal Deposit Insurance Corporation (FDIC), which means that deposits up to $250,000 are protected if the bank were to suddenly collapse.

How high-yield savings accounts work

Compound interest allows your savings to grow quickly in a high-yield savings account.

Compared to simple interest, compound interest means you earn interest on both your principal balance and the interest it earns. With simple interest, it is just calculated based on your principal, or the balance you have in your savings minus interest.

How often your interest is compounded depends on current bank routing number savings account. Some compound daily, while others compound monthly. The more your interest compounds, the greater your return.

With a high-yield savings account, you can withdraw or transfer money (including electronic transfers, checks and wire transfers) out of your account up to six times per month without having to pay a penalty fee or risk having their account closed. However, this federal law, known as Regulation D, has been temporarily lifted for all savings deposits during the coronavirus outbreak as people are requiring more urgent access to their money.

While a strong APY is a big factor in choosing a high-yield savings account, you will also want to look at the fine print. Because online banks don't have the overhead costs that brick-and-mortar banks have to account for, they may offer a higher APY. But it could come with starting deposits, minimum balance requirements and monthly fees, so be sure to read closely.

CNBC Select rated our top five, considering the above qualifications, as well as accounts' ease of use and accessibility.

Below are our top picks:

Bottom line

Before you put all your savings into one place, consider what a high-yield savings account can do for you. When it comes to growing your money over time, choosing an account with a higher return is a no-brainer.

Information about Marcus by Goldman Sachs High Yield Online Savings, Ally Online Savings Account, Synchrony Bank High Yield Savings, Vio Bank High Yield Online Savings Account, and Varo Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

Here’s Why a High-Yield Savings Account Is Worth Having

If you already have a checking account or a savings account with a brick-and-mortar bank, you may not think that opening a high-yield savings account is worth the trouble. How does a savings account work with interest opening a new account can pay off in 3 big ways: 


1. You’ll Earn Much More Interest

When you stash your money in a savings account, you expect your money to grow over time. Unfortunately, you might be in for a depressing surprise if you use a regular savings account. According to the Federal Deposit Insurance Corporation (FDIC), the national average annual percentage yield (APY) is just 0.06%. 

To put that in perspective, let’s say you saved $1,000 in a savings account with that measly interest rate. After 5 years, your account would have increased to $1,003; you’d only get $3 in interest growth. 

High-yield savings accounts, on the other hand, offer a much higher rate of return. For example, if you opened a high-yield savings account with a 1.60% interest rate and deposited $1,000, your balance would grow to $1,080 over the course of 5 years. With the higher rate, you’d earn $80 purely from interest! 


Savings AccountHigh-Yield Savings Account
Interest Rate0.06%1.60%
Initial Deposit $1,000$1,000
Term5 years5 years
End Balance$1,003$1,080
Total Interest $3$80


2. You’ll Build a Savings Habit

Why open a high-yield savings account? Life has a habit of sneaking up on you at the worst times. Whether your car gets a flat tire on your way home from work or your dog gobbles your socks and needs surgery, emergencies happen. Unfortunately, we’re rarely prepared for them. 

According to the Federal Reserve, 39% of Americans wouldn’t be able to pay for a $400 emergency with savings. Instead, they’d have to borrow money or use a credit card, or they wouldn’t be able to cover the cost at all. 

If you don’t have money tucked away in a savings account, you’re in a vulnerable position. If something bad happens — and it inevitably will at some point — you’ll be left scrambling to pay the bill. 

Opening a new high-yield savings account and setting up automatic contributions can help you prepare for the worst. Even if you only deposit a few dollars each week, you can start building a safety net walmart online price match you can rely on when times are bad. 

3. You’ll Reach Your Goals Faster

What’s the problem with only having a checking account or stashing cash in an envelope under your mattress? 

The money is too accessible. If a sale pops up or how does a savings account work with interest new must-have phone launches, you can empty out your cash quickly, making it difficult to keep up your savings habit. 

Having a separate savings account can help you stay focused on your goals. And, thanks to federal regulations, you can only make unify financial credit union headquarters withdrawals from a savings account per month. 

“The advantage is that you’ll be less likely to dip into your savings for routine purchases since that will involve a different account,” said Renfro. 

“If the money were all in the same account, the psychological barrier wouldn’t be as high.”

Because there’s a limit on how often you can move your money over, you’re less likely to spend it on something unnecessary. Whether you want to save for an hsbc usa login credit card fund (go you!), splurge on a European vacation, or buy a car, a new high-yield savings account can help you reach your goals faster.


How do Savings Accounts Work in a Zero Interest World?

Like standard savings accounts, high yield savings accounts are FDIC insured. This means your money is safe and backed by the full faith and credit of the U.S. government, provided your balance doesn’t exceed the FDIC limit of $250,000. But the interest rates on high yield savings accounts are far higher than on standard accounts. In May 2020, the annual compound interest rate, or Annual Percentage Yield (APY), on high-yield savings accounts was as much as 1.5%, compared with an average of 0.06% on standard accounts.  For more about APY, see “The Differences Between APR, APY, and Interest Rates.”


However, higher APYs on savings accounts come with strings attached. You may have to make a minimum deposit to open the account, such as $500 or $1,000. You might have to agree to pay an amount, like $100, into the account monthly. And if the balance on your account drops too low, the interest rate could fall sharply, or you might have to close the account. Additionally, there could be annual or monthly service charges. It’s worth comparing the APYs, conditions, and charges on different high yield savings accounts to see what works best for you.


Although high yield savings accounts offer much higher interest rates than standard accounts, they are not immune from Fed interest rate changes. High yield savings account APYs have fallen since the Fed cut rates to zero,3 and they could fall more if the Fed were to introduce negative interest rates. However, they would likely rise if the Fed raised rates.



Many high yield savings accounts come with online tools that you can use to move money from your high-yield account into your checking account for spending purposes. Additionally, you how does a savings account work with interest be able to use ATMs, and some banks provide checks or a debit card. However, high yield savings accounts aren’t intended for everyday spending. You can deposit money as often as you like, but Fed regulations limit withdrawals from the account to six per month.4


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