A Pros And Cons Of High Yield Savings Account

A high-yield savings account provides a secure location to save your money while also earning you interest. The greater interest rate allows your savings to grow quicker than in a regular savings account. Rising interest rates have made these accounts even more appealing, with APYs exceeding 4% — and even up to 5%.

The advertised APYs are not promotional offers designed to generate business for the bank. This is the amount you'll earn until the Fed raises interest rates again. But, before you create a new account, read more about how they function, including the benefits and drawbacks of high-yield savings accounts.

What is a high-yield savings account?

A high-yield savings account offers a significant advantage over ordinary savings accounts: a higher interest rate. This results in a larger yearly percentage yield, meaning more money in your pocket.

According to the FDIC, the average interest rate on a typical savings account is 0.46% as of November 6, 2023. When compared to high-yield savings account rates, the difference is clear. UFB Direct's High Yield Savings account presently earns a 5.25% annual percentage yield (APY). Synchrony Bank's High Yield Savings account pays a 4.75% annual percentage yield (APY). Capital One*'s 360 Performance Savings account has an annual percentage yield of 4.25%.

Why should you choose a high-yield savings account?

You'll earn higher interest and see your savings increase faster than in a standard savings account. Here are some examples of earned interest in a HYSA versus traditional savings.

Consider a conventional savings account, which pays an average interest rate of 0.46%. If you deposit $1,000 into the account and do not make any additional contributions, you will earn $4.61 in one year. In a high-yield savings account yielding 5.12% interest, the identical deposit will earn $52.42 in a year.

If you add $100 to your savings account each month, you can earn even more money. By the end of the year, your regular savings account will have grown by $7.14. If you keep your money in a high-yield savings account, you can make nearly $81 in interest.

High-Yield Savings Accounts Versus Certificates of Deposit

High-yield savings accounts and certificates of deposit are secure ways to save your money and often pay more than standard savings accounts. Both accounts are likewise protected by the FDIC or NCUA, as long as they are opened with an insured financial institution.

The interest rate differs significantly between different packages. The numbers may be identical or almost identical, but one is usually fixed and the other variable. When you invest in a CD with a fixed rate, you are guaranteed that the rate will remain constant during the CD's duration, regardless of what the Fed does. A high-yield savings account's interest rate is variable and can rise or fall in response to Fed interest rate changes.

High-yield savings accounts are typically more liquid than CDs. If you need to access your cash, you can do so as long as you follow the bank's policy. Cashing out your CD early will normally cost you money, so be aware of the early withdrawal penalty.

Advantages and disadvantages of a high yield savings account

At first look, a high-yield savings account appears to be a no-brainer: greater interest rates, compounding interest, minimal or no fees, among other benefits. However, just like any other financial instrument, it has its pros and disadvantages. To assess whether or not a high-yield savings account is a good fit for your financial goals, you must consider both sides of the argument.

Benefits of A High-Yield Savings Account

Higher interest rates: The most obvious benefit of a high-yield savings account is the higher interest rate than you would get in a standard savings account. Your balance can earn more money in a high-yield savings account with an interest rate that exceeds the national average.

Compound Interest: When the bank starts paying interest on your account balance, it compounds. This means it's added to the balance, allowing your money to increase faster. Assume your original deposit of $1,000 earns $5 in interest by the end of the month. Your new balance is $1,005, and you will receive interest on the entire amount.

Insurance: High-yield savings accounts may have FDIC or NCUA insurance, which ensures your funds are protected up to $250,000. Even if the bank fails, your funds remain protected. With that protection, you avoid the chance of losing your money. Accessibility: Unlike certificates of deposit, which often have greater interest rates, high-yield savings accounts allow you to withdraw money without penalty. If you run into a cash flow problem or an unforeseen emergency, you can get the funds you need right now.

There are low-cost choices accessible. Not every high-yield savings account is made equal. However, if you browse around, you can find solutions with no monthly fees or minimum balance limitations. As a result, the bank will not drain your savings to cover a low balance, excessive withdrawals, or maintenance fees.

Mobile Banking Options: Many high-yield savings accounts provide mobile banking apps that allow you to manage your money on the go. The app allows you to monitor your balances, deposit checks, and plan transfers and withdrawals.

What Is the Drawback to a High-Yield Savings Account?

The opportunity to earn more money is appealing if you want to increase your savings, but the interest rate is not the only factor to consider when selecting a savings account. High-yield savings accounts are not ideal products. Here are some reasons why people avoid them.

Interest rates fluctuate: The interest rates on a high-yield savings account vary according to market conditions. In a rising interest rate environment, you may value the ability to continue accessing higher interest rates. However, in a declining interest rate environment, you may opt to lock in a higher rate with a certificate of deposit.

Inflation might be a serious threat to the value of your savings account. Even with a reasonably high annual percentage yield, inflation may surpass your interest returns. If the inflation rate exceeds the interest rate attached to your account, your funds will lose actual value over time. Inflation might be a serious threat to the value of your savings account. Even with a reasonably high annual percentage yield, inflation may surpass your interest returns. If the inflation rate exceeds the interest rate attached to your account, your funds will lose actual value over time.

Tiered rates: Some banks offer various rates dependent on account balance. In some circumstances, they keep the best APY for higher sums. Others apply the claimed rate to smaller sums, such as the first $1,000 or $2,500. In some circumstances, the rate reduces for the remaining balance, resulting in your money earning two distinct rates.

Withdrawal limit: A federal regulation was previously enacted to prohibit you from withdrawing funds from your account more than six times each month, however, this rule was suspended in 2020. Some banks still limit consumers to six withdrawals each month, and making further withdrawals may incur a cost.

Lack of physical branches: Many of the banks offering the highest APYs do not have actual branch locations, allowing them to save money and pass it on to customers in the form of higher interest rates. If you prefer physical banking, you may miss out on the greatest APYs.

Is it worth having a high-yield savings account?

It may be worthwhile to put your money in a high-yield savings account if it would help you accomplish your financial objectives. As long as you are comfortable utilizing mobile banking apps and do not need to visit a physical branch, you can allow your money to generate more interest and increase your balance. These accounts are conveniently accessible, so you don't have to fully give up the opportunity to earn interest on your money.

A high-yield savings account can be an excellent way to save money for short- and medium-term financial goals. You can use it to save for an emergency fund, a vacation, or a large purchase, such as a down payment on a car or a new roof. With interest rates at historical highs, now is an excellent moment to open a high-yield savings account.

If you don't require flexible access to your savings and prefer to lock in greater interest rates, other financial products may be a better option. For example, you may use a CD to save money in a low-risk approach. Alternatively, if you are saving for a long-term objective, such as retirement, you may prefer to engage with a financial advisor to create an investment portfolio.