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A high-yield savings account can be a great place to store your cash savings. You can expect an above-average interest rate and relatively easy access to your money. Typically available through online banks, a high-yield savings account is considered a low-risk investment. Your money is shielded from the ups and downs of market volatility, but holding too much of your wealth in savings could come back to bite you.
Pros and Cons of High-Yield Savings Accounts
Like any other financial product, a high-yield savings account has its pros and cons.
- Higher-than-average interest rates: High-yield savings accounts usually have attractive annual percentage yields (APYs). At the time of this writing, the average rate on a traditional savings account is just 0.39%, according to the Federal Deposit Insurance Corp. (FDIC). Some high-yield savings accounts boast APYs as high as 4.75%.
- A safe place to store your savings: Just like regular savings accounts, high-yield savings accounts are FDIC-insured. This provides coverage of up to $250,000 per depositor per ownership category. If your account is with a credit union, National Credit Union Association (NCUA) insurance provides similar coverage.
- Easy access to funds: For the most part, liquidity isn't an issue with a high-yield savings account. That's why it's an ideal holding place for emergency savings and cash you're setting aside for short-term financial goals.
- Convenient transfers may be limited: Some financial institutions put a cap on how many free withdrawals and transfers you can make each month. (A common limit is six.) Every bank is different so be sure to read the fine print.
- Fees may apply: Your bank or credit union may tack on monthly fees, or charge you if you use an out-of-network ATM or fail to maintain a minimum balance. Overdraft penalties may also apply.
- Holding too much in savings isn't necessarily the best strategy: High-yield savings accounts often offer the best APYs among bank accounts, but it's still wise to diversify your investment portfolio. That means investing in a variety of different asset classes and industries. Making space for some higher-risk investments could also help you net better returns in the long run.
What Should You Use a High-Yield Savings Account For?
A high-yield savings account could be a great place for:
- Your emergency fund: A common rule of thumb is to save three to six months' worth of expenses in your emergency fund, though you might go higher if you have irregular income or work in a turbulent industry. Think of your cash savings as a safety net. If your income unexpectedly dips or you run into a surprise expense, it can be there to catch you. With a high-yield savings account, those funds will earn interest.
- Money for near-term goals: Accounts like certificates of deposit (CDs) and retirement funds aren't known for their liquidity. Pulling your money out early usually triggers fees. If you're saving for short-term financial goals, a high-yield savings account is usually the better option. That can include everything from your next vacation to a home renovation project to a mortgage down payment.
- Saving for non-monthly bills: Not every bill is due on a monthly basis. Certain expenses may come up at random times of the year. Whether it's your car insurance premium or the bill for your child's summer camp, saving little by little can help you cover these costs without busting your budget. You could transfer a certain amount of money to a high-yield savings account each month. That way you'll be ready when those bills come due.
How to Choose a High-Yield Savings Account
When shopping around for a high-yield savings account, see how different financial institutions measure up in terms of:
- APY: This is expressed as a percentage and represents how much interest your money will earn as it grows.
- Minimum opening deposit: This typically isn't required, but if it is, you'll need to have enough cash on hand to open the account.
- Minimum balance requirements: Most high-yield savings accounts don't require you to maintain a minimum balance, but every financial institution has its own rules. You could be hit with a fee if your balance dips below a certain amount.
- Fees: This can include overdraft fees, monthly service fees and more. Look carefully at the term and conditions, and don't be afraid to ask questions if you need clarification.
- Convenience: Consider ATM availability, mobile banking features, transfer and withdrawal limits, and customer service reviews. A high interest rate may not be worth it if it's difficult to access and manage your money.
Find High-Yield Savings Accounts
The Bottom Line
A healthy savings account is an important part of financial wellness. Without it, you might be more likely to accumulate credit card debt to cover surprise expenses. A high-yield savings account can provide a safe space to store and grow your cash reserves. Every financial institution is different, so be sure to shop around to find the best savings account for your needs.