Here's What $40,000 Could Earn You in a High-Yield Savings Account in a Year

Whether you're looking to build up your emergency savings or boost a fixed income, a high-yield savings account may be a valuable tool to help you make the most of your money. Since high-yield savings accounts benefit from compound interest and often feature higher interest rates than what you'll find from traditional savings accounts, high-yield savings accounts may help you leverage your money.

Let's take a look at what you might make if you have $40,000 to deposit in your account for a year. Plus, we'll cover what to expect from interest rates and how to find the account that's right for you.

How high-yield savings accounts work

High-yield savings accounts are similar to traditional savings accounts, but they tend to offer substantially higher interest rates. While traditional savings accounts have interest rates averaging around 0.41%, high-yield savings accounts often feature interest rates of about 4%.

The higher interest rate means your money may grow faster, and compound interest means that the interest your money earns may also boost your balance and start to earn interest.

Online banks often offer high-yield savings accounts, and they're able to offer those higher interest rates because they don't have the expenses that come with brick-and-mortar locations. Banks may offer perks on high-yield savings accounts like no minimum deposit requirements, but they might not offer other options, like ATM cards or the option to make a traditional deposit.

Potential drawbacks to high-yield savings accounts

There's a lot to like about high-yield savings accounts, but there are some drawbacks to be aware of, too. The interest rate on high-yield savings accounts is variable, meaning it could change at any time. While that opens up an opportunity to earn high interest, it's also possible that the interest rate could drop and you could earn less on your money.

Some banks limit the number of withdrawals or transfers you may make, and you might pay fees if you exceed those limits. Generally speaking, high-yield savings accounts tend to be less flexible than traditional savings accounts.

High-yield savings accounts may help you earn interest on your money, but that interest is usually taxable, so keep that in mind when putting money in an account.

How interest accrues and is compounded

High-yield savings account interest compounds, which means you earn interest on the interest over time. Interest often accrues daily, and it's typically compounded monthly. When interest is compounded monthly, you'll then earn interest on the interest that was added in the previous month, helping to accelerate your money's growth.

How much you might earn with a $40,000 initial deposit

Let's say you deposit $40,000 into a high-yield savings account paying 4% interest. Let's say that the interest stays consistent over the course of a year. After three months, you'll have earned $401.33.

By six months, you'll have earned $806.70, and by nine months, that figure grows to $1,216.13. At the end of the year, assuming you make no withdrawals, you might earn $1,629.66 on your money.

Projections on interest rates

Since high-yield savings account interest rates are variable, the general economy could impact how much you might earn on your deposit. The Federal Reserve chose to maintain interest rates during its June meeting, but current projections suggest there's an increased chance that the Fed might increase interest rates.

The Fed typically raises interest rates in an attempt to keep inflation in check, and there are currently several factors pressuring the Fed to consider a rate hike. President Trump announced the reinstatement of a blockade of Iranian ports and the implementation of a 20% toll on cargo through the Strait of Hormuz. The announcement was followed by a jump in oil prices, and if oil prices continue to surge, inflation might increase, too.

If the Fed raises the interest rate, banks are likely to change their interest rates to reflect that alteration, meaning your high-yield savings account interest rate might increase. Generally, the Fed makes interest rate changes gradually, so this might not be a steep hike, but compounding interest might amplify the impact of even a small rate increase, so you might earn more money.

Choosing the right high-yield savings account

High-yield savings accounts vary in terms of interest rates, minimum required deposits, fees, and more, so it's important to shop around for the right account. When you compare accounts, focus on the annual percentage yield (APY), which shows the effect of compound interest, and try to find an account with a high APR to maximize your earnings. Carefully review any fees, such as monthly maintenance fees. Consider whether the account has any requirements, like a required minimum balance or the need to make regular deposits, and think about whether those requirements fit with your financial health and your goals.

You should also think about how easily you'll be able to access your money once it's in the account. The lack of physical branches, long transfer times, or caps on the number of monthly transfers you're allowed to make may all reduce accessibility.

Finally, make sure that your money is insured. For example, many banks are insured by the Federal Deposit Insurance Corporation. Confirm that the account is insured and verify how much of your money is insured before making a deposit.

Bottom line

A high-yield savings account may help you earn interest on your money while still keeping it accessible. It may be a good option for idle cash or emergency funds that you don't want to invest and that you might need to use in the near future.

Just like any other financial product, it's essential to shop around and compare your options when opening a high-yield savings account, but the right account may be a valuable tool in helping you make extra money.

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