While 71% of Americans have a savings account, not all of them use high-yield savings accounts. Generally, a high-yield savings account makes it easier to grow your balance, thanks to higher returns. However, that doesn’t mean they don’t come with drawbacks. Here’s what you need to know about the pros and cons of investing in a high-yield savings account.
How Does a High-Yield Savings Account Work?
High-yield savings accounts are deposit accounts that offer higher interest rates than those that are typically provided by banks and credit unions. However, they otherwise follow many of the same rules, including insurance on up to $250,000 through the FDIC or NCUA and potential withdrawal restrictions in accordance with Regulation D.
Most high-yield savings accounts are through online institutions, so there isn’t a brick-and-mortar branch to visit for withdrawals or customer service. Instead, transactions are primarily handled digitally, using a website or app to manage transfers, deposits, and more.
Pros
Higher Returns
The average APY (as of April 2023) on savings accounts in the U.S. is 0.37%. With a high-yield savings account, APYs are typically significantly higher. Exactly how much better varies by institution, though rates above 3% aren’t uncommon in this arena currently. Some high-yield savings accounts even have APYs above 4%.
When interest rates are higher, your money grows faster. In turn, you’ll see your balance increase quickly in comparison to if you used a traditional savings account.
Easy Access to Funds
Generally, accessing funds in a high-yield savings account is simple. If you have a checking account with the same institution, you can typically move savings into that account with a couple of clicks or taps and spend it immediately using a connected debit card. Additionally, ATM access to the funds is possible.
When transferring money to a checking account at another institution, the process is relatively simple. In most cases, the cash arrives in the checking account within a couple of business days, too, so it’s still reasonably accessible.
Less Risk With Market Fluctuations
While investment options like stocks are highly subject to market fluctuations, high-yield savings accounts are less impacted. While interest rates can shift up or down depending on the Federal Reserve rates, those movements don’t happen frequently. As a result, while APYs can change, they’re not particularly volatile. Plus, you can’t lose any part of your balance just because there’s a momentary downturn; it just may not grow as fast.
Cons
Not Ideal for Daily Banking
While a high-yield savings account is an excellent option for long-term savings, it’s not a great option for daily banking. There are typically limits on the number of monthly withdrawals, and going over that line can trigger fees or account closures. However, that’s also true of many traditional savings accounts, so it’s critical to keep that in mind.
More Requirements to Follow
In many cases, high-yield savings accounts can come with more requirements. As mentioned above, withdrawal limits aren’t uncommon. Additionally, specific actions may trigger fees.
In some cases, interest rates are also tiered. When that happens, getting the best APY requires having a balance at or above a specific threshold. Depending on where that threshold sits, hitting that mark may be challenging for some savers.
Varying Interest Rates
High-yield savings accounts don’t typically come with fixed interest rates. Instead, the rates are variable, as they’re tied to the Federal Reserve rate. As a result, if the Federal Reserve lowers interest rates, the interest rate on your savings account can decline. However, when Federal Reserve rates go up, the interest rate on your savings account usually climbs soon after.
