Saving money, everyone wants to make the most out of the process. But so many options avail themselves; sometimes it gets hard to actually tell which will suit you. Of late, one option that has been in the works and gaining so much attention is the high-yield savings accounts.
But are they worth all this hype? Let’s dive in and see exactly what high-yield savings accounts are, how they work, and perhaps they can be the best choice for your hard-earned money.
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What is a High-Yield Savings Account?
What precisely is a high-yield savings account? In general, it is a savings account that pays higher interest rates when compared with a traditional savings account. That, itself, by the definition of the term “high-yield”, means reaping higher interest with deposited money in these accounts.
Why would that matter, though? Well, the higher the interest rate is, the more money you are going to make over time. For example, with a traditional savings account, you could make an interest rate as high as 0.01% to 0.05%.
In a high-yield savings account, the interest rates can be as high as 1.5% to 2.5%, and sometimes even higher. With that in mind, your money could grow much faster, even if you’re not adding a lot to it on a regular basis.
How Do High-Yield Savings Accounts Work?
High-yield savings works much like a traditional savings account, yet a few things set them apart:
- Interest Rates: The interest rate is perhaps the most pronounced, as touched on above. High-yield savings accounts usually have much higher rates and thus greatly increase the amount of interest one would earn over time. Use our High-Interest Savings Calculator to see how different rates impact your savings.
- Online-Only Banks: Most of the high-yield savings accounts come from banks that are completely online. Regarding this, since they don’t have to pay for physical branches, they can pass the savings on to you in the form of higher interest rates.
- Balance Requirements: Some high-yield savings accounts do have minimum balance requirements. That means that to get that higher interest rate, you will have to keep a certain amount of money in that account.
- Fees: High-yield savings accounts charge less in terms of fees, compared to the average savings account, but it is always prudent to go through their fine prints. Some of them will charge you for certain transactions, which could be as simple as taking out more than six withdrawals of money in a month.
Benefits of High-Yield Savings Accounts
Now that you know what a high-yield savings account is, let’s go into the benefits. The first big one:
- Higher Interest Rates: The higher these rates are, the better and quicker your savings will grow over time than any traditional savings account could.
- Safety and Security: Most high-yield savings accounts come under the protection of the FDIC up to $250,000 per depositor. What this really means is that your money will be safe even in the case when the bank fails.
- Liquidity: Unlike other investment avenues, such as stocks or bonds, your money is liquid in it. You can withdraw money from it anytime you need it without any penalty incurred, though the number of withdrawals may be restricted per month.
- No Loss of Money: Unlike in stock market investment where you incur a loss if the market goes down, the balance amount in a high-yield saving account never goes down. You are assured that your money is safe.
The Disadvantages of High-Yield Savings Accounts
While high-yield savings accounts pride in a host of admirable benefits, some certain disadvantages of this account are:
- Changes in Interest Rates: You will find your interest rate that accrues for a high-yield savings account may drop over time. When the Federal Reserve cuts interest rates, the interest rate you are earning for your account may lower in turn.
- Inflation: While it would appear that a high-yield savings account pays better compared to a traditional savings account, it probably does not keep pace with inflation over time because of the erosion of your money’s purchase power.
- Limited Growth Potential: Although yielding a higher return than its counterpart savings account, a high-yield savings account really doesn’t offer the same growth potential as other investments, such as stocks or mutual funds.
- Online-Only Banks: Most high-yield savings accounts come from online-only banks, and that may be a deal-breaker for you if you enjoy physically visiting the bank. They often do not have the complete suite of services traditional banks might have, either.
Are High-Yield Savings Accounts Right for You?
Should you open a high-yield savings account? It depends on your financial goals and needs.
If you are looking for a safe place to park your emergency money or your short-term savings, a high-yield saving account can be a great option. A higher interest rate means the money will grow faster, with access to cash if and when the need arises.
On the other hand, if you’re targeting long-term growth and are willing to assume higher risks, then you’d be better off looking into alternative investment choices like stocks, bonds, mutual funds, etc.
These options can have a much greater potential for return but also run a much greater risk of losing money.
How to Choose a High-Yield Savings Account
If you determine a high-yield savings account will fit your needs, here are a couple of tips for choosing the best:
- Shop Interest Rates: Seek out accounts offering the highest interest rates. Make sure that you read the fine print; some banks only extend promotional rates lasting only a few months.
- No Fees: Look into accounts that offer very low or no fees. Some banks may charge overactive accounts, including those that allow you to take more than six withdrawals a month.
- Avoid Minimum Balance Requirements: Some high-yield savings accounts will require you to keep money in them to receive the higher interest rate. Keep this in mind as you look at savings accounts.
- Check on Accessibility: If you’re the type of person who enjoys working with a bank face-to-face, consider whether or not your account of choice has physical branches or at least ATMs.
- Check for FDIC Insurance: It should be FDIC-insured because it is one of those factors that ensure your money is secure.
Conclusion
High-yield savings really should be among the best options for any people ready to grow their savings with zero risk. These accounts pay higher interest rates than a standard savings account but can have more access to your money.
They’re just generally not going to be the best one to consider in terms of long-term growth or keeping up with inflation. Again, that would depend on an individual’s financial situation and goals, but high-yield savings accounts really don’t seem to be as worth it as they were hyped to be.
Take the time to compare your options and find the best account for you. Happy saving!
