Are High-Yield Savings Accounts Worth It? Exploring The Pros and Cons

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Contributor, Benzinga
October 10, 2023

High-yield savings accounts have a place in most financial planning. Should they be the only long-term savings vehicle you use? Absolutely not! Are they a smart place to stash an emergency fund or to save for a house downpayment? Yes! Like most financial products, a high-yield savings account has pros and cons. Instead of a blanket statement, learn the nuances to answer the question,  “Are high-yield savings accounts worth it?” for specific financial situations.  

What is a High-Yield Savings Account?

A high-yield savings account is a bank account designed for savings that offers higher interest rates. While typical saving accounts may offer interest rates from 0.01% to 1%, high-yield savings accounts offer interest rates from 3% to 5%, allowing your money to grow faster as it sits in the account.

Interest rates are usually noted as APY or annual percentage yield. Although interest is calculated on the basis of daily account balances, you’ll see an interest payment in the account at the end of the month.

High-yield savings accounts, like traditional savings accounts and checking accounts, are insured by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Association (NCUA) for up to $250,000 per account holder, per institution. That means if you have two high-yield savings accounts at two different banks or credit unions, they are each insured for up to $250,000.

Advantages of High-Yield Savings Accounts

High-yield savings accounts have significant advantages. Below are the reasons you should consider a high-yield savings account.

Higher Interest Rates

Higher interest rates mean your money works for you even when it just sits in a bank account. While you can access it any time and gain benefits of insurance up to $250,000, this low-risk savings option can pay interest rates of 3% to 5%. At the higher end of the range, your money should grow faster than inflation, preserving its spending power with time. 

Easy Accessibility

With a high-yield savings account, you can withdraw or transfer funds anytime. The government doesn’t limit the amount you can withdraw from your savings account, although some banks may limit you to six withdrawals or transfers per month. The limitation isn’t an issue for most people who use the account to save for long-term goals. 

Uniquely, Cove Capital Liquid Income increases liquidity and offers high annual percentage yields. This product is backed by real estate, still offers FDIC protection and allows you to save quite a lot of money in one place. With a minimum deposit of $100,000, this account helps high-net-worth individuals save money without reducing access for long periods of time.

Low Risk

Savings accounts are FDIC or NCUA insured up to $250,000 per account holder, per institution. That means a couple who are both listed as account holders could keep up to $500,000 in a single savings account. If the bank collapses, the government guarantees their savings up to that amount. 

Safety and Security

High-yield savings accounts are a zero-risk way to store money. While the interest rates aren’t high enough to lead to huge leaps in wealth, at the higher levels, they can be a secure place to grow wealth. For example, $100,000 in a high-yield savings account with 5% APY would be worth $265,330 in 20 years, more than doubling your money. 

Flexibility 

With a high-yield savings account, you have the flexibility to withdraw funds or make deposits at any time. You can transfer a little bit with each paycheck or make a larger single deposit. Most high-yield savings accounts have low minimum balance requirements and a generous withdrawal limit, so you can move your money as needed. 

Flexibility is also evident when working with platforms like Upgrade.

Upgrade offers a 5.07% APR on its savings accounts, but you can also obtain debit cards and open checking accounts through this platform. Upgrade offers personal loans up to $50,000, and you can even manage your money through the app. This means that you can handle most of your money in one place, save money, borrow and take control of your finances.

Limitations and Risks of High-Yield Savings Accounts

High-yield savings accounts aren’t a one-stop solution for all financial goals. There are times when a high-yield savings account doesn’t make sense. Here are the limitations of these savings accounts. 

Minimum Balance Requirement 

Some high-yield savings accounts have minimum balance requirements that must be maintained to earn the advertised interest rate. While you could earn 5% APY with a $20,000 deposit, you might only earn 1% APY with a $1,000 deposit. 

For those just building savings, this can negate the significant benefit of a high-yield savings account. Read the fine print to understand the limitations of a specific bank’s offerings. 

Limited Transactions 

High-yield savings accounts may have limitations on the number of monthly transactions, such as withdrawals or transfers. Exceeding these limits may result in fees or the account being converted to a regular savings account. This varies by bank or credit union, so it’s best to ask the financial institution about transaction limits when you open the account. 

Inflation Risk 

As seen in recent years, inflation can surpass a high-yield savings account’s highest available interest rates. When this happens, the money you keep there loses spending power over time. While average inflation rates are 2% to 3%, in high-inflation years, money in a high-yield savings account could lose value. 

Opportunity Cost 

Keeping money in a high-yield savings account means you don’t have it invested in stocks, bonds, real estate and other assets that could potentially lead to higher returns. While opportunity cost is difficult to measure, it’s widely accepted that you shouldn’t keep the money you need for faster growth in a high-yield savings account. 

Rates Fluctuate

Even at a single bank, interest rates can fluctuate. In some cases, your interest rate may increase, but in other cases, the bank may reduce your interest rate and only inform you with a letter or online notification. If you miss that notification, your interest rate could drop from 5% to 2%, significantly impacting projected returns. 

What Are Some Practical Ways to Make Use of a High-Yield Savings Account?

When should you use a high-yield savings account? Here are a few situations where it can make sense. 

Emergency Fund

Your high-yield savings account is the perfect vehicle for your emergency fund. Consider keeping three to six months’ worth of expenses in an emergency fund. You can add extra for large unexpected expenses. 

Ideally, you won’t have to dip into your emergency fund. But when life’s unexpected events happen — from a car repair to medical expenses — you’ve got the funds to cover it. While they sit in a high-yield savings account, they should earn more than average interest rates, preserving your spending power. 

Short-Term Goals

High-yield savings accounts are also a great place to save for short-term goals like a vacation, a down payment on a house or purchasing a new vehicle. You may choose to have multiple savings accounts or subaccounts to save for different goals. 

Monthly Expenses

A high-yield savings account is a great place to deposit your paycheck for monthly expenses. You’ll earn a little interest in the time between when you receive a payment and have to make payments. 

Of course, this only works if your savings account doesn’t have transfer limits or if you make most expenses on a single credit card and only have to make one or two monthly payments. 

Saving for Retirement 

While a high-yield savings account is not typically considered a long-term investment vehicle for retirement, it can be used as a short-term savings tool to hold funds before investing them in a retirement account or other investments. 

Likewise, as you approach retirement age and shift your investment strategy to a more conservative approach, you could transfer more cash reserves into a high-yield savings account. 

What to Look for In a High-Yield Savings Account

If you’re ready to open a high-yield savings account, below are the factors to check.

Interest Rate

The point of a high-yield savings account is a secure place to earn higher interest rates. Look for 4% to 5% interest rates to maximize account growth. 

APY (Annual Percentage Yield)

Annual percentage yield (APY) is the technical expression of interest rates. A high-yield savings account should have an APY of 4% to 5%. That means you’re earning 4% to 5% interest over the course of a year. To calculate the monthly interest, divide that number by 12. An APY of 5% means you'll earn an average of 0.041% monthly on your deposits. 

Fees

Be sure to check all account fees carefully. This can include monthly maintenance fees, low-balance fees or transfer fees. Look for a high-yield savings account with low or no fees. 

Accessibility

Most high-yield savings accounts offer online access or apps to manage your funds easily. Check that you’ll be able to check account balance, confirm the APY and easily view transfers and account information. 

Account Limits

Some high-yield savings accounts have minimum balance requirements. Others may have minimum balances for higher interest rates. Check account limits to understand what you’ll need to earn the greatest value from the account or whether another option is better. 

FDIC Insurance

The FDIC and NCUA offer insurance for deposits in savings accounts at banks or credit unions, respectively. Insurance covers up to $250,000 per account holder, per institution. Double-check that any bank or credit union you’re considering is either FDIC or NCUA insured to protect your savings. 

Customer Service

Exceptional customer service means you’ll be able to understand account terms and troubleshoot any issues easily. Look for a high-yield savings account at a bank or credit union that comes highly rated by other customers. 

Bank Stability

While FDIC or NCUA insurance can protect your account, bank stability should still be a factor when looking for a high-yield savings account. You don’t want to deal with the hassle of a bank collapsing or a takeover. Look for a bank with strong reserves and a long history of stable performance. 

Alternatives to High-Yield Savings Accounts

Sometimes, a high-yield savings account isn’t the best choice for your funds. Below are four alternatives to consider.

Certificates of Deposits

Certificates of deposits (CDs) are a type of savings instrument sold by banks and credit unions. CDs may have higher interest rates than savings accounts, but you must hold them for a specified duration. This time, called a term until maturity, varies from six months to 10 years. Generally, the longer the term, the higher the interest rate. You could face penalties if you withdraw funds from the CD before maturity. When you purchase the CD, you select the term and available interest rates. CDs can be a secure way to store funds for medium-term savings goals. 

Money Market Accounts

Money market accounts are a flexible option many consumers choose instead of a high-yield savings account for everyday expenses. Like high-yield savings accounts, money market accounts can have 3% to 5% interest rates. Unlike savings accounts, you’ll usually get a debit card and checks with a money market account. There’s no limit on withdrawals or monthly expenses you can make from a money market account. 

Bonds

Bonds are issued by the government or corporations. Bonds are units of debt securitized as tradable assets. Bonds are considered a fixed-income instrument because they usually pay a fixed interest rate to debt holders. Interest rates vary by type of bond and term to maturity. 

While bonds are low-risk investments, they are not risk-free. Current government savings (low-risk) bonds have an interest rate of 4.3%. Generally, investors use bonds to balance risk in a portfolio with other high-risk investments like stocks. 

Mutual Funds

Mutual funds pool money from many investors to purchase securities. Mutual funds are professionally managed by a fund manager whose role is to diversify risk and reach performance returns targets. Mutual funds usually offer higher interest rates than high-yield savings accounts. However, they carry risks and aren’t guaranteed. 

The minimum to invest in a mutual fund depends on the fund. While some have no minimums, others may require $500, $5,000 or $1 million to invest. Look for mutual fund managers with a strong history of fund performance. 

Best High-Yield Savings Accounts

Ready to open an account but aren't sure where to start? Benzinga has you covered. Check out a few of the top high-yield savings accounts below and open an account today!

Using High-Yield Savings Accounts to Reach Your Goals

High-yield savings accounts, investments and retirement accounts like individual retirement accounts (IRAs) or 401(k)s can form an integral part of your financial planning. These tools, used together, can help you reach both long-term and short-term financial goals. Learn about savings accounts versus Roth IRAs to find the right balance for your savings goals. And discover the balance for savings accounts versus investing in creating a balanced plan for wealth preservation and growth.

Frequently Asked Questions

Q

How can you open a high-yield savings account?

A

You can open a high-yield savings account online or at a physical bank branch. Find some of the best high-yield savings accounts here.

Q

Do high-yield savings accounts have any tax implications?

A

Any earnings, including interest earnings from high-yield savings accounts, must be reported on your individual income tax return. Speak with a certified public accountant (CPA) or tax adviser for individual implications.

Q

Can you link your high-yield savings account to your checking account?

A

Depending on your bank’s policies, you can link a high-yield savings account to your checking account to easily transfer between the two accounts.

About Alison Plaut

Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.