financemaster.org 75ab0b6c983803ac55cfe96a578896c2 - Examining the Advantages and Disadvantages of High-Yield Savings Accounts
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A high-yield savings account offers a safe place to store your cash with an added bonus. The higher interest rate means your savings can grow faster than in a traditional savings account. Rising interest rates have made these accounts even more attractive, as they are paying APYs above 4% — and even as high as 5%.

The APYs you see advertised are not promotional offers to drum up business for the bank. This is what you’ll earn until the Fed adjusts interest rates again. But before you open a new account, learn more about how these accounts work, including the pros and cons of high-yield savings accounts.

What Is a High-Yield Savings Account?

A high-yield savings account is a savings account with a great perk: a higher interest rate than you’ll get with a traditional savings account. This equals a higher annual percentage yield, which means more money in your pocket.

According to the FDIC, the average interest rate on a traditional savings account is 0.46%, as of Nov. 6, 2023. Compare this to the rates offered for high-yield savings accounts, and you can quickly see the difference. UFB Direct’s High Yield Savings account currently has an APY of . The High Yield Savings account at Synchrony Bank pays an APY of . Capital One* offers an APY of for the 360 Performance Savings account. 

Why Choose a High-Yield Savings Account?

You’ll earn more interest and grow your savings faster than with a traditional savings account. Here are some examples to compare the earned interest between a HYSA and traditional savings.

Take a look at a traditional savings account that pays the average interest rate of 0.46%. If you deposit $1,000 in the account and do not contribute more, you will earn $4.61 in one year. That same deposit in a high-yield savings account paying 5.12% interest will earn $52.42 in one year.

If you contribute $100 to the savings account each month, you can earn even more money. In the traditional savings account, you’ll have an additional $7.14 by the end of the year. You can earn almost $81 in interest if you have the money in a high-yield savings account.

High-Yield Savings Account Vs. Certificate of Deposit

High-yield savings accounts and certificates of deposit are safe places to keep your money, and they typically pay better than traditional savings accounts. Both accounts also have protection from FDIC or NCUA, as long as you open the account with an insured financial institution.

A key difference between these products is the interest rate. The numbers may be the same or nearly the same, but one typically has a fixed rate and the other a variable rate. When you put your money in a CD with a fixed rate, you have a guarantee the rate will stay the same for the entire CD term regardless of what the Fed does. The rate you get with a high-yield savings account is variable, and it can go up or down when the Fed adjusts interest rates.

High-yield savings accounts tend to be more liquid than CDs. If you need access to your cash, you can withdraw it as needed — as long as you follow the bank’s policy. Cashing in your CD early will usually cost you, so pay attention to the early withdrawal penalty.

Pros and Cons of a High-Yield Savings Account

At first glance, a high-yield savings account seems like a no-brainer: higher interest rates, the ability to compound that interest, low or no fees, among many others. 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.

Advantages of a High-Yield Savings Account

  • Higher interest rate: The most obvious advantage of a high-yield savings account is the higher interest rate compared to what you would earn in a traditional savings account. Your balance can earn more money in a high-yield savings account with an interest rate higher than the national average.
  • Compound interest: When the bank begins paying interest on your account balance, the interest compounds. This means it’s added to the balance and helps your money grow at a faster rate. Say, for example, your initial deposit of $1,000 earns $5 in interest by the end of the month. Your new balance is $1,005, and you’ll earn interest on the entire amount.
  • Insurance: High-yield savings accounts can offer FDIC or NCUA insurance, which means your funds are protected for up to $250,000. Even if the bank closes, your funds are insured. With that protection, you don’t run the risk of losing your funds.
  • Accessibility: You can withdraw money from a high-yield savings account without penalty, unlike certificates of deposits that typically have higher interest rates. 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 to pay for a low balance, excessive withdrawals or maintenance.
  • Mobile banking options: Many high-yield savings accounts come with mobile banking apps to help you manage your money on the go. You can monitor your balances, deposit checks and schedule transfers or withdrawals through the app.

What Is the Downside to a High-Yield Savings Account?

The potential to make more money is great if you want to boost your savings, but the interest rate isn’t the only feature to consider when choosing a savings account. High-yield savings accounts are not perfect products. Here are some of the reasons people avoid them.

  • 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.
  • Tiered rates: Some banks pay different rates, based on the account balance. In some cases, they reserve the best APY for larger balances. Others pay the advertised rate for smaller balances, like the first $1,000 or $2,500. In those cases, the rate drops for the remainder of the balance, which means your money earns two different rates. 
  • Withdrawal limits: A federal law was implemented previously to prevent you from withdrawing cash from your account more than six times each month, but this rule was suspended in 2020. Some banks still limit customers to six withdrawals in a month, and 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, which helps them save money to pass on through higher interest rates. If you prefer brick-and-mortar banking, you might miss out on the highest APYs.

Is It Worth It To Have a High-Yield Savings Account?

It can be worth it to have your money in a high-yield savings account if it will help you meet your financial goals. As long as you’re comfortable using mobile banking apps and don’t need to visit a physical branch, you can let your money earn more interest and boost your balance. These accounts are easily accessible so you don’t have to completely give up your ability to earn interest on your funds.

A high-yield savings account can be a good place to set aside money for short-term and mid-range financial goals. You can use it for your emergency fund or when you’re saving for a vacation or big ticket item like a down payment on a car or a new roof. With interest rates at historical high levels, now is a great time to consider a high-yield savings account.

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 work with a financial advisor to build an investment portfolio instead.

Final Take

If you’re keeping money in a savings account — and you should be — it makes sense to let that money earn as much as it can. A high-yield savings account may be the right solution for you. However, the interest rate isn’t the only feature to consider. Before opening an account, shop around to find the one with the combination of features and interest rate that will meet your financial needs. Pay attention to the fine print to make sure you understand account limitations, especially if the bank offers tiered interest rates.

Sarah Sharkey contributed to the reporting for this article.

Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of Nov. 6, 2023.

*Any savings on interest will vary depending on account usage and payment behavior.

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