A high-yield savings account is one that earns interest at a higher percentage rate than those attached to most traditional savings accounts. Although the name implies a greater reward than the investor receives with a regular savings account, the interest rate might not match your idea of high. Rates vary from one financial institution to another, and they often fluctuate.
Opening a High-Yield Savings
High-yield savings accounts in some ways are similar to money market accounts. Generally, you may access the funds at any time without penalty. Unlike a traditional savings account, a high-yield savings account may require a significant opening deposit and a minimum balance. These accounts also carry limits on the number of withdrawals you may make per year. Qualifications for opening a high-yield savings account may vary among financial institutions.
Financial institutions compete to offer the best interest rate, and they change rates without notice for any of a number of reasons. Economic conditions significantly affect interest rates. In a booming economy, interest rates tend to be higher. Many banks offer tiered high-yield accounts to provide higher interest rates on accounts that exceed a certain balance.
Locking in a Rate
Because funds in a high-yield savings account are readily accessible, the interest rate is not locked. A certificate of deposit — or CD — is an account that allows you to lock in an interest rate for a specific period of time. Although the interest rate may be higher with a CD, you face fees and penalties if you choose to close the account or withdrawal funds.
At the time of publication, savings accounts established with a bank or credit union are insured up to $250,000 by the Federal Deposit Insurance Corporation. Other investments through the same financial institution are not similarly protected. Mutual funds, stocks, annuities and life insurance policies are classified as non-deposit investments and are not insured by the FDIC.
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