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Budgeting & Saving

Are High-Yield Savings Accounts Worth It?

Saving is an important part of any healthy budget, but doing it with a regular savings account may mean missing the opportunity to grow your wealth. With a high-yield savings account, you can get a higher return than you would with a regular savings account.

Your cash will be safe from market fluctuations and other risks that come with investing, and it'll stay easily accessible. Here's what to know.

What Is a High-Yield Savings Account?

A high-yield savings account is a bank account that pays you interest on your deposits. It functions like a traditional savings account, but offers a higher annual percentage yield (APY) to make your money grow faster.

On average, high-yield savings accounts earn about 1% APY. This may still seem low, but the average interest rate on savings accounts below $100,000 was just 0.06% as of August 2020, according to the Federal Deposit Insurance Corporation (FDIC).

High-yield savings accounts aren't designed for frequent activity, though. The federal government limits you to six withdrawals per month, and you may be charged a fee for each additional withdrawal. Repeat violations of this policy may also cause the bank to switch your account to a checking account or shut it down completely. (Note: The Federal Reserve Board recently suspended this rule as a result of the ongoing pandemic's impact on the economy. Banks can now allow "customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits" without incurring any fees.)

What makes high-yield savings accounts a safe option to grow your money? They are regulated and backed by the FDIC or National Credit Union Administration (NCUA), which both insure deposits up to $250,000.

When Does It Make Sense to Open a High-Yield Savings Account?

You may choose to place your funds in a high-yield savings account for many reasons. Here two common uses for a high-yield savings account:

  • Emergency fund: In the event that you lose your income or encounter another major financial emergency, having three to six months' worth of expenses tucked away in a savings account can help get you through it. Money that's kept in a high-yield savings account will safely accrue interest over time, and it'll be freely accessible for when any sudden need arises.
  • Short-term savings goal: Are you planning to buy a home or car, fund a vacation or make another big-ticket purchase soon? A high-yield savings account gives you a safe place to store cash until you meet your goal.

If a high-yield savings account seems like a good fit for your financial goals, the next step is to explore your options.

How to Choose a High-Yield Savings Account

You can get a high-yield savings account at a credit union, online bank or brick-and-mortar bank. Here are some factors to consider when exploring your options:

  • Interest rate: The accounts you are considering should have a higher APY than regular savings accounts. Look for options that offer an APY of 1% or higher. Online banks are generally able to offer higher interest rates, but lack physical branches you can visit to manage your money in person.
  • Opening deposit: Is there an opening deposit requirement? Do you have this amount available? If not, choose an account that allows a lower amount to get started. Also, be mindful that you may have to deposit a larger amount to earn the maximum APY offered on the account.
  • Minimum balance requirement: Will you be required to keep a certain balance in the account at all times? Unless it's an amount you can afford to maintain and doesn't conflict with your reasons for opening the account, you may want to look at other options.
  • Fees: Read the fine print to determine if there are monthly maintenance fees or penalties for overdrafts or returned deposits. The bank or credit union may also charge a fee for wire transfers or excessive monthly withdrawals. You should choose an account with minimal fees to maximize the return on your money.
  • Transfer policy: Does the bank charge for transfers to and from linked accounts? If you plan to move money in and out of your high-yield savings account, choose an option that doesn't charge fees for this service.
  • Insurance: The account should be insured by the FDIC if offered by a bank or NCUA if offered by a credit union.
  • Accessibility of funds: Does the bank or credit union allow you to withdraw funds through an ATM? Are there other options to access your money?
  • Mobile features: Can you view your account from the bank or credit union's mobile app? Are mobile deposits allowed or do you have to visit a branch?

Ultimately, the high-yield savings account that's right for you depends on your personal goals, situation and finances. For example, an account that's excellent for someone who can deposit $10,000 immediately may not be ideal for someone making a more modest deposit.

Alternatives to High-Yield Savings Accounts

High-yield savings accounts can be great for certain savings objects, but there are better options for long-term goals, such as saving for retirement or growing your down payment for a house. Before opening a high-yield savings account, consider these alternatives as they may be a better fit for your finances:

  • Money market account: A money market account may be a better fit if you want a more flexible option. This type of account is like a high-yield savings account in the interest rate it offers, money security and accessibility. Where they differ, however, is that money market accounts allow you to write checks to access your funds. Some money market accounts may also require you to maintain a higher minimum daily balance to avoid maintenance fees.
  • Certificate of deposit: your money is placed in an account that earns a higher level of interest while it "matures" over a set period of time. Your funds are still accessible during this time, but you'll face penalty fees for making early withdrawals. Historically, CDs have generally outearned high-yield savings accounts, but low Fed interest rates mean yields are similar for the time being.
  • Individual retirement account (IRA): An IRA can help build your nest egg faster than a high-yield savings account. IRA accounts aren't meant for short-term saving, and early withdrawals come with penalties. They are not without risk, but you can select a more conservative investment strategy that can still earn a hefty return on your money over time. Contributions to many IRA accounts can also reduce your tax liability.
  • 401(k): A 401(k) is like an IRA, except it's offered by your employer. Like IRAs, 401(k) accounts also tend to offer a high earning potential, and can have tax benefits. Many employers that offer 401(k) plans will also match contributions made to the account up to a certain percentage of your salary (3%, for instance).
  • Stock market: The stock market is another alternative to grow your money. You can diversify the investments in your portfolio to reduce risk. Still, there's no way to guarantee that you won't lose money if the market fluctuates.

The Bottom Line

You can grow your money faster and meet short-term financial goals with a high-yield savings account. However, it's important to evaluate your options before choosing an account.

Also consider other alternatives that may be a better fit for your financial situation. Money market accounts are more flexible; investing in the stock market is risky, but can have big yields; and CDs may offer a higher, reliable interest rate. If you're saving for retirement, explore your options in terms of IRA and 401(k) accounts.

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