Choosing the right high-yield account hinges on how frequently you need to access your funds. Here's what to consider.
What exactly is a high-yield savings account? And what about a high-yield checking account? While they may sound alike, key differences exist that you should be aware of before making a choice.
If you haven't looked into high-yield accounts yet, here's a brief overview. A quick search reveals that high-yield online savings accounts from various institutions are currently offering rates exceeding 4% APY. Similarly, high-yield checking accounts, like this option from SoFi, features an attractive 3.80% APY.
Here's how to differentiate between a high-yield savings and checking account.
WHAT ARE THE KEY DIFFERENCES?
The primary distinction between high-yield savings accounts and high-yield checking accounts lies in the accessibility of your funds. Most high-yield savings accounts limit monthly withdrawals or transfers—typically to six—despite the Federal Reserve lifting this restriction in 2020, as some banks opted to maintain it. Additionally, high-yield savings accounts seldom offer conveniences such as debit cards or electronic bill pay.
With a high-yield checking account, you can make unlimited withdrawals, which are actively encouraged. Banks typically require customers to meet specific criteria to qualify for the highest interest rates. Examples include using your debit card 10 to 15 times monthly, setting up regular direct deposits, opting for electronic statements, and enrolling in bill payments, as noted by the FDIC.
WHICH ACCOUNT IS RIGHT FOR YOU?
TIP: Don't just go for the highest advertised checking account rate. Look into the default rate if you don't meet all the requirements for the top rate.
Another crucial aspect is convenience. Many high-yield accounts are offered by smaller regional banks or online-only institutions, which may add extra steps for basic transactions.
TIP: Examine ATM access (and fee reimbursements), the speed of deposits and transfers, and whether you can realistically make 10 to 15 debit card transactions each month.
Consider when you'll need your funds. A high-yield online savings account is ideal for money you won't need to access soon, like for an emergency fund, saving for a new laptop, car repairs, or donations.
TIP: If you have a more extended timeframe and wish to avoid stock market risks, you might get a better rate with a certificate of deposit (CD). With a CD, you can lock in your interest rate for a set duration, unlike fluctuating rates in high-yield savings and high-yield checking accounts.
Think about the required activity levels. Will you generate sufficient transactions to earn the higher APY? Many high-yield checking accounts require a minimum amount of activity that generates revenue for the bank, like debit card purchases or bill payments.
TIP: A high-interest checking account could be beneficial if you run a business, are self-employed, or have a side gig. It helps keep work-related transactions separate from personal ones.
Plus, it's a good way to set aside funds for quarterly taxes. Consider opening a joint high-yield checking account for family expenses. This makes it easier for multiple users to meet the monthly activity requirements for higher interest rates.
