Pros and Cons of High-Yield Savings Accounts

A high-yield savings account offers a safe place to store your cash. But a high interest rate means that your high-yield savings account will produce interest earnings to help your savings grow faster than a traditional savings account.

Keep reading to find out what a high-yield savings account is and take a look at the pros and cons of this financial product.

What Is a High-Yield Savings Account?

A high-yield savings account offers a significantly higher interest rate to savers. According to the FDIC, the average interest rate on a basic savings account is 0.30%, as of Dec. 28, 2022. When you open a traditional savings account, you can expect to find an interest rate somewhere in that low range. Although your funds are safe and accessible, you won’t enjoy the benefits of significant interest earnings.

If you are looking to earn significant interest through a savings account, that’s when a high-yield savings account comes into play. You can find interest rates over ten times the national average through a high-yield savings account. For example, TAB Bank offers a high-yield savings account with a APY.

Pros and Cons of a High-Yield Savings Account

At first glance, a high-yield savings account seems like a no-brainer. But like all financial products, there are some advantages and disadvantages tied to it. You’ll need to weigh both sides of the equation to determine if a high-yield savings account is a good fit for your financial plans. Here’s a closer look at the pros and cons of a high-yield savings account.

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Advantages of a High-Yield Savings Account

  • Higher interest rate: The most obvious advantage of a high-yield savings account is the ability to tuck your savings away and earn more interest than you would in a traditional savings account. Although you can earn more interest through other types of investment products, a high-yield savings account doesn’t come with the risk of loss.
  • Savings build over time: Saving money over the long term can transform your financial future. But everyone has to start somewhere. When you open a high-yield savings account, there are options with low minimum deposits to get started. From there, your interest earnings and additional contributions will push your account balance higher.
  • Insurance: High-yield savings accounts can offer FDIC insurance, which means your funds are protected for up to $250,000. Even if the bank closes, your funds are insured. With that, you don’t run the risk of losing your funds.
  • Accessibility: When you tuck your funds into a high-yield savings account, you can pull them out at any time. If you run into a cash flow issue or unexpected expense, you can access the funds you need immediately.
  • Low fee options available: Not all high-yield savings accounts are created equally. But if you shop around, there are options without any monthly fees or minimum balance requirements. With that, your savings won’t be leeched away by the bank.
  • Mobile banking options: Many high-yield savings accounts come with mobile banking apps to help you manage your money on the go.

Disadvantages of a High-Yield Savings Account

Although there are many advantages, many may wonder “what is the downside to a high-yield savings account?” Here are a few to keep in mind.

  • Interest rates change: The interest rates tied to a high-yield savings account fluctuate based on market conditions. In a rising interest rate environment, you might appreciate the ability to continue tapping into higher interest rates. But in a falling interest rate environment, you might prefer to lock in a higher rate through a certificate of deposit.
  • Inflation: Inflation can pose a real threat to the value of your savings account. Even with a relatively high APY, you might find that inflation outpaces your interest earnings. If the inflation rate is higher than the interest rate tied to your account, your funds are losing real value over time.
  • Withdrawal limits: Federal laws prevent you from withdrawing cash from your account more than six times each month. After making 6 withdrawals in a month, you might have to pay a fee to make any additional withdrawals.
  • Lack of physical branches: Many of the banks that offer the top APYs don’t have physical branch locations. If you prefer brick-and-mortar banking, you might miss out on the highest APYs.
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Is a High-Yield Savings Account Worth It?

The best place to put your savings varies based on your financial goals. If you are looking for an easily accessible spot to store cash without completely giving up your ability to earn interest on your funds, a high-yield savings account is a good option. For example, it’s a great place to stash your emergency fund or your savings for a relatively short-term money goal.

If you don’t need flexible access to the funds and want to lock in higher interest rates, other financial products might be a better fit. For example, you might opt for a CD to tuck away funds in a low risk way. Or, if you are saving for a long-term goal, like retirement, you might choose to build an investment portfolio instead.

Final Take

A high-yield savings account offers many advantages to savers who want easy access to their capital. You won’t have to worry about getting your funds when you need them. But you’ll still have the opportunity to lock in reasonably high interest rates.

Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of Dec. 28, 2022. 

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About the Author

Sarah Sharkey is a personal finance writer with a desire to help readers improve their own financial balance sheets. After earning a bachelor’s degree in biology, she went on to business school. With a master’s degree in Management from the Hough School of Business at the University of Florida, she loves diving into the details of personal finance. With years of experience as a personal finance writer, she helps readers grasp the concept and take control by breaking down complex topics filled with jargon down to their basic components. After all, a little bit of knowledge can go a long way in the world of personal finance.

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