Pros and Cons of High-Yield Savings Accounts

Quick Answer

High-yield savings accounts can provide you with higher interest rates than a traditional savings account, but you may face limits to transfers and withdrawals.

Couple weighing pros and cons of a high yield savings account

With a high-yield savings account, you can expect a higher interest rate when compared to a traditional savings account—and that allows your money to work a little harder for you. Many are offered by online banks that promote a high annual percentage yield (APY), which represents how much an account holder will earn in interest over the course of a year. Higher-than-average APYs can be attractive, but not all high-yield savings accounts are created equal.

Pros of High-Yield Savings Accounts

It's a Safe, Interest-Earning Account

Like a traditional savings account, a high-yield savings account pays interest. That means your deposited funds will earn money for sitting in the account. Savings accounts also allow you to benefit from compound interest. In other words, you'll earn interest on your interest.

Interest rates can vary widely from bank to bank. At the time of this writing, the average rate on a traditional savings account is just 0.39%, according to the Federal Deposit Insurance Corporation (FDIC). Meanwhile, some high-yield savings accounts offer rates topping 4%.

Deposit accounts, which include savings accounts, are FDIC insured. If your bank fails and your funds are lost, FDIC insurance will provide coverage of up to $250,000 per depositor, per ownership category (such as single or jointly owned). You don't need to apply for coverage. FDIC insurance kicks in automatically and will disburse funds to qualifying account holders, usually within two business days.

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Your Investment Risk Is Low

Individual stocks, cryptocurrency, private equity and hedge funds all carry high investment risk. These markets can swing wildly, leading to significant returns or steep losses. High-yield savings accounts are considered much safer investments. Returns tend to be more modest, but account holders can rest easy knowing their cash reserves aren't at the mercy of market volatility. FDIC insurance provides additional protection.

Savings accounts tend to offer variable interest rates, meaning APYs can change at any time. These rates are directly tied to the federal funds rate the Federal Reserve sets to influence the cost of borrowing money. Savings account yields usually mirror the funds rate. When it increases, savings account APYs usually follow suit, and vice versa.

Liquidity Isn't an Issue

Some investments don't provide easy access to your funds. A certificate of deposit (CD) is a good example. This type of account rewards you for leaving your money in the account for a set amount of time. At the time of this writing, some CD rates are as high as 5%. But there's a catch—you'll likely be penalized if you pull money out of the account before the maturity period ends. The penalty will depend on the term of the CD, but it's usually based on the account's interest.

Similarly, retirement funds like a 401(k) or traditional IRA can be great ways to grow your nest egg, but they aren't known for their liquidity. Both charge a 10% early withdrawal penalty if you tap your funds before age 59½, and you're taxed on the amount you withdraw.

With a high-yield savings account, you can expect relatively easy access to your money. Some financial institutions may limit how many free transfers and withdrawals you can make each month, but liquidity generally isn't an issue. That makes a high-yield savings account a good place to store your emergency fund.

Cons of High-Yield Savings Accounts

Transfers and Withdrawals May Be Limited

As we just hinted at, some financial institutions may put a cap on how many convenient transfers and withdrawals you can make in a given month. That can include electronic transfers. The Federal Reserve once required banks to limit consumers to six savings account withdrawals per month, but this rule has been paused since 2020. However, some financial institutions may continue to uphold it or charge fees if you make too many electronic transfers.

These kinds of policies are meant to discourage consumers from pulling money out of their savings accounts. That isn't necessarily a bad thing—it might deter you from dipping into your savings for non-emergencies. With that said, be sure you understand any limitations before opening a high-yield savings account.

You Could Be Missing Out on Higher-Return Investments

Savings accounts aren't known for being high-return investments. If you're looking to really grow your wealth over the long term, holding too much in savings could actually work against you. Even the highest APYs lag behind average annual stock market returns, which have historically been around 10%.

Underinvesting could mean missing out on potential growth. That's not to say that investing in the stock market is a sure thing—far from it—but sprinkling some high-risk investments into your portfolio might help you stay diversified. The idea is to have a healthy mix of investments across a range of asset classes.

Some Financial Institutions Charge Fees

Most high-yield savings accounts don't charge monthly fees or impose a minimum balance requirement, but that isn't a hard-and-fast rule. Every bank and credit union is different, which means that fee structures can vary. You'll also want to look out for penalties for overdrafts or returned deposits. That's on top of fees they may charge for making too many monthly withdrawals.

Here's a rundown of what to consider when shopping around for a high-yield savings account:

  • APY
  • Fees
  • Minimum account balance requirements
  • Minimum opening deposit requirements
  • Convenience (such as access to ATMs and mobile banking)

How to Open a High-Yield Savings Account

Online banks and credit unions generally offer better interest rates than brick-and-mortar ones. It's wise to compare different high-yield savings accounts and see how they measure up in terms of fees, restrictions and convenience. When you're ready to open an account, you may need to provide your:

  • Name and date of birth
  • Physical address and mailing address
  • Social Security number
  • Driver's license or passport number

Once your account is open, you can set up your online banking credentials and link your new high-yield savings account to your checking account. This will allow for easy transfers and withdrawals in the future. You can also think about the best way to use a high-yield savings account. Aside from housing your emergency fund, you can use it to save for:

  • Major purchases
  • Big events or life changes
  • Child expenses
  • Liquid retirement funds
  • Travel

The Bottom Line

A high-yield savings account probably won't lead to huge investment returns, but everyone needs a safe place to keep their emergency fund. Just be sure to clarify if there's a minimum balance requirement or other fees.

Opening a high-yield savings account won't directly affect your credit—and having cash on hand for financial emergencies might make you less likely to accumulate credit card debt. Meanwhile, resources like free credit monitoring can keep you up to date with what's on your credit report.

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