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High-yield savings account vs. traditional savings account: Why it’s worth the switch

Cassidy Horton
Updated
High-yield savings account vs. traditional savings account: Why it’s worth the switch (d3sign via Getty Images)

With the Federal Reserve on June 12 deciding to hold its benchmark rate unchanged at a 23-year high, you’re hearing a lot about high-yield savings accounts these days. You might wonder if there’s a catch for the APYs advertised for these types of accounts — and maybe even hesitate to move your money from a traditional savings account.

The fact is that high-yield savings accounts or HYSAs earn a much higher interest rate than traditional savings accounts — we’re talking 10 to 20 times more. That extra money can go a long way in padding your retirement savings.

If you’re reluctant to switch banks, read how an HYSA compares to a traditional savings account — it just might give you the nudge you need to get started.

A high-yield savings account is like a high-powered savings account. It earns a much higher interest rate with fewer fees than you’ll find with a traditional savings account, helping your money to grow faster.

You can typically find HYSAs at online banks and credit unions — not physical institutions like Bank of America or Wells Fargo. But your money is insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), just like at your current bank. So you can earn more without any extra risk.

There’s no catch: The biggest reason online banks can afford to pay more interest and charge fewer fees is that they operate within a smaller footprint. They’re not paying to staff and manage thousands of branch locations. The bulk of your banking is online, which slashes the bank’s operating costs. In exchange, online banks can pass their savings on to you in the form of fewer fees and stronger interest rates than your typical bank.

HYSAs compare to traditional accounts in key ways beyond higher interest rates. Let’s take a closer look at how high-yield savings accounts compare to traditional accounts.

The biggest advantage of a high-yield savings account is in its name: It earns a higher yield on your savings balance. HYSAs earn 4.00% APY or higher, which is nearly nine times higher than the national 0.45% average of traditional savings accounts.

But here’s the kicker: Chase, the largest bank in the U.S., pays a mere 0.01% APY for its basic Chase Savings account. This is 400 times less than most HYSAs, and much lower than the national average. It’s like earning a single penny per year for every $100 saved.

To put this into perspective, let’s say you keep $20,000 in your savings account as an emergency fund.

If you deposited that $20,000 into a basic Chase Savings account offering 0.01% APY, you'd earn a mere $2.00 at the end of your first year and only about $20 after 10 years, not accounting for compounding interest.

If you deposited that same $20,000 into a high-yield savings account offering 4.00% APY, you'd earn about $800 at the end of your first year and some $9,600 after 10 years. With compounding, the actual numbers would be higher.

As you can see, not keeping your savings in a high-yield account is like robbing yourself of a lot of free money. Imagine having more than $9,000 extra in your savings account just by doing one simple thing — switching to a high-yield savings account. And with many of today’s best HYSAs offering more than 4.00% APY, the switch is a low-effort task with a huge reward.

HYSAs are also a clear winner when it comes to fees. Most have no minimum balance requirements and charge little to no fees for maintaining your account. You can open your high-yield account with any amount of money and not worry about penalties.

Compare that to traditional savings accounts, which require you to maintain a specific balance to avoid monthly maintenance fees as high as $25 or more. You’re essentially paying the bank to hold your money for you, which is a big red flag for savers.

Nearly every bank supports a mobile app these days. So no matter if you go HYSA or traditional, you’re able to manage your account and your money from your computer, tablet or phone — including mobile check deposits, which use the camera on your phone to deposit checks into your account.

Traditional savings accounts do have the advantage of in-person support and the ability to accept cash deposits. But unless you're regularly depositing cash, an HYSA's higher interest rates may outweigh this drawback.

Plus, many HYSAs offer 24/7 customer support, so help is a call or chat away, even if you can’t pop by a branch.

HYSAs and traditional accounts are neck and neck for ease of setting up and managing your accounts.

You can open a high-yield savings account from the comfort of your couch by completing a form on the bank's site, and — voila! — your new savings account is ready to go. Plus, you can easily link your HYSA to your existing checking or savings accounts for seamless transfers.

Traditional savings accounts may also offer the option to set up your account online in addition to in-person signup at a physical branch. But if you go in person, you’ll need to make sure you visit during regular branch hours, which usually aren’t on the weekends.

Dig deeper: How to find and open a high-yield savings account

A high-yield savings account can be a profitable place to store your savings and earn the highest interest possible without fees or minimum balance requirements that can eat into your earnings. These accounts are ideal for large balances and emergency funds, though you’ll need to be comfortable with online or digital banking without in-person support unless your account is with a hybrid bank, like Capital One.

Traditional savings accounts support in-person banking, including withdrawals and deposits at your local branch. If you prefer to chat face-to-face with a teller or keep your savings, checking and other accounts under one roof, it might be a better fit than a digital account — even if the trade-off for brick-and-mortar banking is a significantly lower earning potential.

Here are other ways these two accounts compare to help you find the best fit with your budget, balance and way you like to bank.

Dig deeper: Can you lose money in a high-yield savings account? It’s unlikely — but here’s what to watch out for

HYSAs and traditional savings accounts aren’t your only options for stashing excess cash. Any or all of these alternatives can complement your overall savings strategy.

High-yield money market accounts work much like HYSAs, offering more than nine times the interest rates of traditional savings accounts. But they come with debit card access and check-writing privileges that HYSAs don’t. So if you want more access to your money than a standard HYSA provides, they could be a good call.

Next up are certificates of deposit. CDs are like savings accounts with a twist: You agree to lock up your money for a set period, usually a few months to a few years, and in exchange, you earn a higher fixed interest rate than your typical savings account.

CDs can be good if you’re saving for short-term goals like an international cruise you’ll take in two years or a car you’ll purchase in three years. Unlike the variable interest rates of savings accounts, interest rates for CDs are fixed, making it easier for you to know exactly how much you’ll earn — and helping you to lock in and benefit from historic earning potential long after today's rates drop.

A high-yield checking account is like high-yield savings in that it offers higher APYs than traditional savings accounts, but it’s also like a more flexible money market account in that it supports unlimited debit and check-writing privileges you won't find with an HYSA.

Finally, there are investment accounts. Investments carry more risk than savings accounts or CDs because you’re investing your money in the stock market. But they’re also generally better for building long-term wealth. Ideally, you’ll keep some money in savings for emergencies and short-term goals, investing the rest for a happy and comfortable retirement.

Dig deeper: I'm a personal finance expert: Here's why you need to invest in a CD today

Not all FDIC-insured online banks are created equal — some may offer higher interest rates or better user experiences than others. So as you shop around, ask yourself questions like:

  • What interest rate does this account earn? Look for the highest rate you can earn at a bank offering the services you like.

  • Do I need to do anything to earn this interest rate, like keep a minimum balance? Make sure you can comfortably meet any requirement to earn the highest advertised rate.

  • What fees does this account have? The best high-yield accounts come with no fees to maintain your account.

  • What are all the ways I can deposit or withdraw my money? Many HYSAs partner with ATM networks that accept check deposits with apps for convenient mobile deposits.

Don't be afraid to read reviews, ask for recommendations and crunch the numbers to find the best account for your needs. A little legwork now can lead to big savings down the line.

Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes Advisor, MarketWatch, CNN Underscored, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she's committed to empowering people to stand up and take charge of their financial futures.

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