What are the pros and cons of high-yield savings accounts?

If you’re looking for a place where your money is readily tappable but can grow over time, a high-yield savings account is a good option. These are typically available at online banks and credit unions and can pay more than 10 times the interest of a regular savings account.

Many savers use high-interest accounts to store emergency funds or save for short-term goals. But they’re not a good fit for every purpose, so consider the pros and cons before getting one.

What is a high-yield savings account?

A high-yield savings account is a deposit account that pays a much higher interest rate than a standard savings account. Some brick-and-mortar banks offer high-yield savings accounts, though you’ll often find them at online banks and credit unions. Without the overhead costs of maintaining physical branches, these online institutions can pass the savings on to customers.

Banks and credit unions can change interest rates anytime, so what’s considered "high yield" can fluctuate. But as of March 2023, the national average annual percentage yield, or APY, is 0.35%, according to the Federal Deposit Insurance Corp. (FDIC). In comparison, some high-yield savings accounts offer APYs north of 4%.

Look at one example to see how your account’s APY can affect your earnings. If you deposit $1,000 into a standard savings account with an APY of 0.35% and make no additional deposits for a year, you'd earn $3.51. But if you put the same deposit into a high-yield savings account with an APY of 4%, you’d make a much higher return of $40.81 — just by choosing a different account.

How does a high-yield savings account work?

Once you open a high-yield savings account, the bank or credit union pays you money — in the form of interest — on the deposits you make. Your interest will compound, which means you earn money on your deposits, and the interest accumulates over time. And because high-yield savings accounts usually compound interest daily, you’re earning interest each day.

When it’s time to withdraw money from your account, there may be a few restrictions. For instance, some banks and credit unions won’t link your account to an ATM or debit card. So you might need to transfer your money to another account and withdraw there. Depending on the bank, this may take a day or more if your high-yield savings account and checking account are at different banks. Additionally, some institutions limit the number of monthly withdrawals you can make. The restrictions are in place to encourage you to save and help banks meet reserve requirements.

Pros and cons of a high-yield savings account

When shopping for a high-yield savings account, consider these benefits and drawbacks.

Pros of having a high-yield savings account:

People typically choose high-yield savings accounts to supercharge their savings. These accounts usually offer APYs 10 times (or more) above the average national rate, and you earn interest daily through compounding.

If your bank has deposit insurance through the FDIC, any money you keep there is insured up to $250,000 per person, per account. This coverage keeps your cash safe against bank failure. Federally insured credit unions also have this type of insurance through the National Credit Union Administration.

You’re guaranteed to get the principal you deposit into a high-yield savings account plus any interest you earn (as long as your account has deposit insurance). That means you won’t take on risk as you do when investing in the stock market.

The money in your high-yield savings account is accessible if needed, which can be helpful in a financial emergency. However, you’ll need to understand any monthly withdrawal limits and the process of transferring money to another account. Some transfers may take a few days to complete.

The best high-yield savings accounts won’t charge monthly fees, set opening deposits, require a minimum balance, or establish withdrawal limits. That makes high-yield savings an accessible option for people who don’t have thousands of dollars to deposit.

Savings accounts are pretty straightforward: You can deposit and withdraw money anytime and automatically earn interest on your balance. In addition, many banks and credit unions offer mobile apps that let you track your balance and interest rate and transfer your money to other accounts.

Cons of having a high-yield savings account:

Your bank or credit union can change your APY anytime, so your rate may be great when you open the account and then gradually decrease. Generally, APYs increase when the economy is doing well, and the Federal Reserve raises its benchmark rate. Conversely, rates can drop when the economy weakens, and the Fed lowers rates.

While high-yield savings accounts offer high APYs and zero risk, they’re not the best way to grow your wealth long-term. That’s because your APY can go up and down, and your yield may not outpace the inflation rate. So for long-term goals such as retirement, you’re typically better off investing your money rather than putting it into a savings account.

Most high-yield savings accounts are available at online banks and credit unions, which may add some complications depending on your preferences. For example, you might not have a physical branch to visit when you need help. And what if you took out your checking account and mortgage at another institution? You’ll need to store separate account credentials and receive separate bank statements, and it may take longer to transfer your money to a different bank or credit union.

In the past, federal law limited the monthly transfers and withdrawals you could make from a savings deposit account. This helped banks maintain their cash reserves. The Federal Reserve suspended that rule in 2020, but individual banks and credit unions can choose to restrict transfers and withdrawals. They may also charge a fee or close your account if you exceed those limits.

Who should — and shouldn’t — use a high-yield savings account?

A high-yield savings account may not be the best choice when saving for retirement, or you don’t need your funds within the next year or so. Other accounts — such as retirement accounts or high-yield CDs — may offer tax advantages and higher yields.

But when you’re building an emergency fund or saving for something in the near future, such as a family vacation, a high-yield savings account is an option. The liquidity, guaranteed returns, and strong interest rates can make them a good place to store your funds.

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