Pros and Cons of High-Yield Savings Accounts | The Motley Fool (2024)

High-yield savings accounts are a smart way to grow your money with minimal risk. Offering interest rates significantly higher than traditional savings accounts, they can be an attractive option to maximize your savings.

However, it's crucial to weigh the benefits against potential drawbacks to make sure it's the right fit for your financial goals. We'll explore the pros and cons of high-yield savings accounts to help you make an informed decision.

Pros of high-yield savings accounts

Here are some of the benefits of choosing a high-yield savings account.

High annual percentage yield (APY)

APY represents the rate of return earned on your savings, factoring in compound interest. With a high APY, your money grows faster, making it a powerful tool for building wealth over time.

For example: If you had $5,000 to save, here's how much interest you could earn in a high-yield vs. a traditional savings account:

• High-yield with 4.00% APY: $2,456.96 after 10 years
• Traditional with 0.40% APY: $204.05 after 10 years

(The exact interest earned would depend on many factors -- like how often your bank compounds interest and whether your interest rate changes over the years.)

Safety and security

All the top high-yield savings accounts are FDIC insured up to $250,000 per depositor per bank. This means that the FDIC will reimburse you up to this amount if your bank goes out of business and is unable to pay you back.

The NCUA will reimburse you if you open a high-yield savings account through a credit union and it fails. It has the same insurance limits as the FDIC.

Few monthly fees

Many HYSAs charge zero monthly fees. Since these accounts are almost exclusively available from online banks, they don't have branches with in-person customer service, so they cost less to operate than brick-and-mortar banks do.

Access to your money

Unlike certificates of deposit (CDs), high interest savings accounts let you withdraw money when you need it.

Low investment risk

Putting your money in an HYSA is considered a much safer investment than investing in stocks or bonds since HYSA funds aren't at the mercy of market fluctuations. Your APY may fluctuate, but any interest you earn is just icing on the cake of what you've already deposited.

Cons of high-yield savings accounts

Here are some of the drawbacks to opening a high-yield savings account.

Fluctuating rates

APYs can change over time. Sometimes this is good news, and sometimes it's not.

That's why it's tough to predict how much you'll actually earn in interest in a given year. If the Federal Reserve reverses course on interest rates, then HYSA rates will probably follow.

Withdrawal limits

All savings accounts used to charge customers fees if they made more than six monthly withdrawals. (This was mandated by a federal law known as Regulation D.)

The government waived this at the start of the COVID-19 pandemic and has yet to reinstate it. But some banks still haven't changed their ways.

As a result, you could face penalties if you frequently move money out of your savings account. Search your bank's website or contact a representative to check the bank's policy on withdrawal limits.

Minimum balance requirements

Some high-yield savings accounts have minimum balance requirements, meaning you must maintain a certain balance to get the best interest rate.

For example, if an account requires you to deposit $5,000 to earn a premium rate, but your deposits only total $3,000, you'll earn a lower-than-advertised rate.

Some institutions may also require you to meet minimum deposit requirements, such as depositing $1,000 to open an account. Many of the top HYSAs don't require this.

Effort to withdraw money

Though it's typically easy to withdraw money from a savings account, banks sometimes require extra steps. Most savings accounts don't include checks, and only a few come with ATM cards.

To withdraw cash, you may have to transfer money to a checking account first. This can take a few days if your checking account is at another bank, making it hard to withdraw money quickly.

Lower returns than investments

High-yield savings accounts earn you more money than brick-and-mortar bank accounts do. But often, you still won't earn enough to keep up with inflation. Even though your account balance rises, your buying power decreases.

You can avoid losing buying power by investing your long-term savings in alternatives like the stock market. That way, you have the potential to build serious long-term wealth. In the same vein, money market accounts are best suited to short and mid-term savings.

Are high-yield savings accounts worth it?

A high-yield savings account is a good choice in the following circ*mstances.

Saving an emergency fund

Emergencies break down the door without warning, so you want to keep your emergency savings handy.

If you invest your emergency fund savings in the stock market, you could be forced to sell your investments at a loss if you need to use that money. But you won't have this problem with a high-yield savings account.

Short-term savings

Saving up to make a large purchase within the next five years? A high-yield savings account is a better home for your money than a brokerage account.

The stock market can be unstable in the short term. By sticking to a savings account, you ensure market swings won't eat money you need tomorrow.