High-Yield Savings Account vs. Traditional Savings Account

What Is a High-Yield Savings Account?

A high-yield savings account (HYSA) is one that pays a substantially higher interest rate than a traditional savings account. Exactly how much higher isn’t formally (or legally) defined, but the difference can be great in today’s market: In October 2023 the FDIC reported the average annual percentage yield (APY) on standard savings accounts was 0.46%, while some high-yield accounts are offering APYs greater than 5%.

HYSAs are available from a large number of credit unions and banks, including many online-only institutions that lack physical brick-and-mortar branches. You interact with these digital accounts through a web dashboard or smartphone app and, typically, a debit card you can use for purchases or ATM withdrawals. Deposits typically are made via electronic transfer of funds from your checking account.

High-yield savings accounts are typically held at federally insured banks or credit unions, and balances up to $250,000 (or $500,000 for accounts held jointly by a couple) are insured by either the Federal Deposit Insurance Corp. or the National Credit Union Administration.

What Is a Traditional Savings Account?

Traditional savings accounts are interest-bearing accounts offered by banks and credit unions and designed to hold funds you’re keeping aside for emergencies or for any other purpose you choose. These accounts are not intended for frequent withdrawals or transfers, the way a checking account is, and their terms may limit the number of transactions you can conduct each month or charge fees for transactions that exceed a monthly allowance.

Traditional savings accounts sometimes go by other names: At credit unions, they may be called share accounts. Banks once commonly referred to them as passbook accounts because their transactions were recorded in small notebooks; as banks began replacing passbook accounts with printed and online monthly statements, they began calling them statement savings accounts. All of these terms describe the same type of account.

High-Yield Savings Accounts vs. Traditional Savings Accounts

High-yield savings accounts and traditional savings accounts are different in a few major areas, but there are similarities they share. Here’s what you should expect for the main components of each type of account.

Interest Rate

Whereas traditional savings accounts typically have interest rates in the sub-1% range, an elevated interest rate is the defining trait of a high-yield savings account. HYSA interest rates are typically promoted as annual percentage yield (APY), which represents the percentage by which you could expect a deposit to increase in 12 months at that rate. For example, if you deposit $1,000 in HYSA with a 4% APY, after one year you could expect to have $1,040 if the interest rate stays constant and you make no additional deposits or withdrawals.

Maintenance Fees

Maintenance fees on traditional savings accounts are rare, but some HYSAs charge monthly fees of up to $25. Many of those accounts also include conditions you can meet to avoid paying the fee: Some accounts waive the fee if you keep your balance above a certain amount; others forgo fees if you link the HYSA to a checking account (which may bring fees or conditions of its own). Avoiding fees is crucial to having a high-yield savings account pay off, since, depending on the size of your deposit, a fee of even a few dollars a month could put a significant dent in your interest earnings.

Transaction Fees

Because they are not intended for routine purchases, bill payments or frequent cash access, traditional savings accounts and HYSAs alike may charge fees if you exceed a monthly limit on the number of debit-card transactions and withdrawals you can make.

Inactivity Fee

In addition to fees for too many transactions (see above), some HYSAs and traditional bank accounts charge a fee of $5 to $25 if you let your account remain idle for six months, with no deposits or withdrawals. If this applies to your account, consider setting up a calendar reminder and depositing a few dollars to avoid the fee.

Overdraft Fees

As with any financial account, making a purchase or withdrawal that exceeds your available balance will incur penalties. Your financial institution can charge a fee of up to $30 for an overdraft, and the recipient of your payment may charge you a penalty as well. This applies to HYSAs as well as traditional savings accounts.

Minimum Opening Deposit

Some financial institutions require you to make a minimum deposit when you open your high-yield or traditional savings account. Amounts can range from $25 to $100 or more.

ATM Fees

Debit cards are not included with all traditional savings accounts or HYSAs, but if yours comes with one, you may incur fees if you use an ATM other than one affiliated with your financial institution. If your account is set up at an online-only financial institution, there may be approved ATM networks you can use without charge. Some institutions will also reimburse ATM fees, up to a specified amount per transaction.

When to Choose a High-Yield Savings Account

A high-yield savings account is a good choice for funds you don’t expect (or hope not) to use in a hurry, but that you want to keep liquid and accessible for an emergency. Placing funds in a HYSA keeps your money working for you, earning a healthy return, without binding it up in a (potentially more lucrative) certificate of deposit or other investment instrument that could take days or even months to become accessible.

It may take a few business days to process an electronic cash transfer from a high-yield savings account to your checking account, so keeping a portion of your emergency savings in an account you can access instantly might be prudent, especially if you don’t have a credit card you can use for emergencies (or you prefer not to use it).

When to Choose a Traditional Savings Account

The chief advantage of a traditional savings account is easy, instant access to funds. Keeping a savings account at the same financial institution where you maintain your checking account typically lets you move funds between accounts instantly via a website or smartphone app. This can be convenient for occasional unplanned expenses, particularly if you need to access it quickly to cover emergency car, appliance repairs or unscheduled overnight accommodations, for example.

The potential downside to such easy access to savings is the temptation to dip into savings for non-emergency splurges. If you’re concerned about your ability to resist that urge, consider keeping your savings account isolated from your daily checking account—perhaps by keeping it at a separate financial institution or maintaining separate accounts at the same institution, each with its own debit card. You’ll still have instant access to the cash for urgent expenses, but the extra effort required to access the funds may discourage you from raiding your savings.

Should I Have a High-Yield Savings Account and a Regular Savings Account?

Opening both a traditional and high-yield savings account can be a good strategy that keeps a portion of your emergency fund instantly accessible while the remainder earns high interest while remaining available within a few days.

How you apportion your funds between the accounts may depend on your circumstances, but placing the majority of your emergency fund in a high-yield savings account keeps the bulk of your savings working harder for you.

Multiple HYSAs may also be a good tactic for meeting multiple savings goals. For longer-term savings efforts such as a college savings or a fund you open as newlyweds to fund a 25th-anniversary vacation, keep in mind that certificates of deposit, treasury bills or other securities could offer a greater return on investment than a HYSA.

The Bottom Line

With APYs that can exceed 5% in today’s market, high-yield savings accounts are currently offering very attractive returns, and many advertise no monthly fees and no minimum opening balance. Those high rates probably can’t last forever, but for now at least, it makes sense to consider taking advantage of a HYSA for your household emergency fund, and perhaps for other special savings efforts.