The Pros and Cons of High-Yield Savings Accounts
If you’re interested in growing your funds but still want access to them, a high-yield savings account could be the perfect choice. High-yield savings accounts can be a great way to earn more interest and stash away funds so you can meet your short-term savings goals.
Here, we’ll go over the pros and cons of high-yield savings accounts, and offer our recommendations for getting the most out of these savings vehicles.
What is a High-Yield Savings Account?
A high-yield savings account (HYSA) is what it sounds like: It’s a savings account that offers account holders higher-than-average yields (or interest rates) on the deposits they make.
Here’s an example:
You’re interested in opening a savings account with a $1,000 initial deposit, with plans to add $100 monthly. You could open a traditional savings account, with an average interest rate of 0.07%. Alternatively, you could put your $1,000 in a high-yield savings account, which at the time of the writing of this article, is earning around 3-4%.
If you open that traditional savings account, over a year, you’d get a little over a dollar in interest. At a rate of 3.5%, the high-yield savings account would earn you just under eighty dollars for that year.
That may not seem like much. But imagine if you left money in that account for years. Suddenly, those dollars in extra interest can turn into much more.
What are the Pros of High-Yield Savings Accounts?
In addition to the increased ability to grow your funds through higher interest rates, high-yield savings accounts have many other benefits.
The pros of high-yield savings accounts include:
- The ability to grow your money risk-free (as opposed to an investment, which always comes with some risks).
- The peace of mind that your money is insured. High-yield savings accounts tend to be Federal Deposit Insurance Corporation (or FDIC) insured. With this type of insurance, your funds (up to $250,000 per depositor) will always be protected, even if your bank loses money.
- The flexibility of liquid funds. Taking your money out of a HYSA shouldn’t result in any penalties, and it should only take a day or two to move your money from a HYSA to other accounts.
Why Should I Open a High-Yield Savings Account?
If you already have several financial products to your name—a checking account, a traditional savings account, or an individual retirement account— you may wonder why adding a HYSA is worth it. Here’s why.
High-yield savings accounts are good for short-term savings goals.
While checking and savings accounts are great for managing everyday expenses, and investment accounts are great for long-term asset growth, your HYSA is great for setting aside and growing funds for expenses coming up in one or two years.
For example, if you’re saving up for a home renovation, gifts, or a long-awaited vacation, it makes sense to put that money aside in a HYSA. Once you need it, you can withdraw it easily; and, until you do, it’ll grow faster than it would in checking or savings.
Some companies (such as Betterment) allow you to categorize your HYSA cash in “buckets.” This can help you visualize your progress towards your short-term goals as you make deposits in your HYSA.
Considerations when Weighing the Pros and Cons of High-Yield Savings Accounts
While high-yield savings accounts can be powerful tools to help you reach your short-term savings goals, they may not be for everyone (or for every situation). These aren’t necessarily ‘cons’ of high-yield savings accounts – but they are good things to keep in mind.
- High-yield savings accounts are not best-suited for daily banking purposes. The money you put in a HYSA should stay put so you can start seeing high yields. This means that you will need a checking account in addition to your HYSA.
- High-yield savings accounts usually have more requirements than a regular savings account. Your account may have limits on how much you can withdraw or transfer in a certain amount of time or require a higher deposit when you first open the account.
- High-yield savings accounts are not the most powerful vehicle for retirement savings. High-yield savings accounts will net you more interest than the average traditional savings account, but they likely won’t grow as well as investing in the market. Having a separate account for your longer-term savings goals will be best.
- High-yield savings accounts could be subject to changes in interest rates. Your bank may be able to change the interest rate of your account over time (unlike, say, a CD account). To avoid surprises, ask your bank about how this would work.
Our Recommendations for High-Yield Savings Accounts
Now that we’ve gone over the pros and cons of high-yield savings accounts, here’s what we’d recommend:
First, work with your financial advisor to find a high-yield savings account with requirements and an interest rate that works for you, and then use it strategically to meet your short-term goals. Then, move your emergency fund into a HYSA. It’s a great way to increase your financial resilience and earn interest at the same time.
We usually recommend keeping enough funds to cover 3-6 months of needs (e.g., your rent, car payment, groceries, and insurance payments, not “wants” such as entertainment). If you’re approaching retirement or have a large family, it may be best to work toward a large enough emergency fund to cover one year, if needed.
Commas is a wholly-owned subsidiary of Truepoint Inc., a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A and Form CRS filed with the SEC, can be found at www.usecommas.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice.