Are High-Yield Savings Accounts Worth It? (2024)

Many people are seeking better ways to grow their money and wondering if a high-yield savings account might be the answer. Whether you’re saving for a dream vacation, building an emergency fund or simply exploring avenues to grow your savings, a high-yield savings account could help you supercharge your savings.

But for all their benefits, these accounts aren’t without their drawbacks—plus, there are alternatives that might be a better fit for your needs.

What Is a High-Yield Savings Account?

A high-yield savings account is a type of savings account offered primarily by online banks. It offers a significantly higher annual percentage yield (APY) than traditional savings accounts at brick-and-mortar banks.

High-yield savings accounts are an attractive option for short-term savings goals and emergency funds. They’re insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). That means money you deposit is safe, up to the legal limits.

How Do High-Yield Savings Accounts Work?

High-yield savings accounts work by paying you interest on money you deposit into a savings account (usually with an online bank). These accounts typically offer higher interest rates than traditional savings accounts because online banks have lower overhead costs.

For instance, traditional savings accounts from big national banks often earn around 0.01% APY, while current savings rates on top high-yield accounts are well over 4.00% APY. It’s not uncommon for high-yield savings accounts to earn over 400 times more interest than traditional savings accounts.

You can open a high-yield savings account with ease, often online and sometimes with no initial deposit required. While your money grows with interest, you can access it through online transfers or, in some cases, ATMs.

Pros and Cons of High-Yield Savings Accounts

Pros

• Higher interest rates. High-yield savings accounts offer notably higher APYs compared to traditional savings accounts, allowing your savings to grow more rapidly. Some savings accounts earn 5% or more.
• Safety and security. Funds deposited in these accounts are FDIC or NCUA-insured up to $250,000 per depositor, so your money is safe.
• Easy access to money. You can transfer money out of your high-yield savings account using an online bank transfer.
• Separation from spending. By separating your savings account from your checking account, you’ll likely be less tempted to impulsively spend money you’re trying to save.
• No monthly fees. Many high-yield savings accounts don’t charge monthly fees, so you can maximize your savings without extra costs.

Cons

• Withdrawal limits. Like regular savings accounts, high-yield savings accounts may come with a monthly withdrawal limit, such as six withdrawals a month, and can charge a fee if you exceed this limit.
• Limited access to your money. High-yield savings accounts often have fewer withdrawal methods than traditional savings accounts. Some online banks don’t offer an ATM network, for example, and most savings accounts don’t come with a debit card. Some online banks may not offer a checking account, meaning transferring funds to your external checking account could take an extra day or two. Still, many online banks offer mobile banking apps that make it easy to transfer funds to your checking account on the go.
• APYs can fluctuate. Savings account interest rates can change at any time. This uncertainty can impact your ability to predict how much interest you might earn.
• Not ideal for long-term growth. While good for short-term goals, high-yield savings accounts may not provide the growth needed to build long-term wealth. They often have relatively low long-term returns compared to stocks and bonds.
• Minimum requirements. Some high-yield savings accounts require a minimum deposit to open the account or a minimum balance to earn the highest APY.
• Limits on interest. Banks occasionally restrict their highest interest rate to balances below a certain threshold. For instance, you may only earn the highest advertised APY if your balance is below $10,000, while the portion of your balance above that amount might earn significantly less interest.

Is a High-Yield Savings Account Worth It?

Having at least one high-yield savings account is worth it for most people. The best high-yield savings accounts offer several advantages, including competitive interest rates and safety. Here are two reasons why you might consider one:

1. Emergency savings. High-yield savings accounts are an excellent choice for building an emergency fund. They provide a safe place to store cash you might need readily available for unexpected expenses. Keeping three to six months’ worth of living expenses in a high-yield account is a common guideline.
2. Short-term goals. These accounts are also valuable for short-term financial goals. Whether you’re saving for a vacation, a down payment on a home or a major purchase, the liquidity and interest rates can help your money grow steadily without exposing it to significant risk.

While high-yield savings accounts offer higher interest rates than traditional savings accounts, they may not outpace inflation, potentially eroding your purchasing power over time. As a result, they’re not typically recommended for long-term wealth-building or retirement savings.

To make the most of your financial strategy, avoid keeping excessive amounts of cash in high-yield savings accounts. Consider diversifying your investments for long-term growth and wealth preservation.

Alternatives to High-Yield Savings Accounts

Depending on your financial situation, a high-yield savings account might not be worth it right now. In those cases, there are alternatives.

Checking Accounts

Checking accounts are the go-to option for everyday spending and bill payments. But they’re not typically good for saving money because they earn little to no interest. Choose a checking account over a high-yield savings account when you need immediate access to your money to cover daily living expenses. These accounts come with a debit card and have no transaction limits.

Certificates of Deposits (CDs)

Certificates of deposit (CDs) can be a good alternative to high-yield savings accounts when you have a specific savings goal in mind and can afford to lock your money away for a set period of time.

CDs typically offer higher interest rates than savings accounts but require you to leave your money untouched for a predetermined period. They’re ideal for longer-term savings goals, like a down payment on a home or funding a major purchase, when you can afford to let your money grow without regular access.

Money Market Accounts

A money market account (MMA) is a hybrid financial product that combines features of both savings and checking accounts. It typically offers higher interest rates than regular savings accounts and allows limited check-writing and debit card access.

Compared to a high-yield savings account, MMAs give you more ways to access your money and may come with slightly higher interest rates. But they typically require a much higher minimum opening deposit.

How To Choose the Right High-Yield Savings Account

Not all high-yield savings accounts are the same. Use these factors to find an account that aligns with your financial goals and can help you maximize your savings potential.

• Annual percentage yield. Start by comparing the APYs offered by different banks. With a higher APY, your money will grow faster. Use a savings calculator to estimate your earnings.
• Minimum opening deposit. Consider how much money you have available to open the account. Some require a minimum deposit, while others don’t.
• Minimum balance requirements. Review whether the account requires a minimum balance to earn interest or avoid fees. Opt for an account with manageable or no balance requirements.
• Fees. Examine the fee structure, including monthly service fees, penalties for falling below the minimum balance and excess transaction fees. Look for accounts with minimal or no fees.
• Convenience. Assess the account’s convenience factors, like ATM access, mobile banking and customer service quality. Ensure it aligns with your preferences.
• Withdrawal limits. Check if the account has restrictions on the number of free monthly withdrawals. Select an account that suits your withdrawal needs.
• FDIC or NCUA insurance. Ensure the financial institution you choose is FDIC or NCUA-insured so your money is protected.