Introduction

With a high-yield savings account, you can expect a higher interest rate compared to a traditional savings account, allowing your money to work harder for you. Many of these accounts are offered by online banks that promote a high annual percentage yield (APY), representing how much an account holder will earn in interest over the course of a year. While higher-than-average APYs can be attractive, not all high-yield savings accounts are created equal.

Pros of High-Yield Savings Accounts

It’s a Safe, Interest-Earning Account

Like a traditional savings account, a high-yield savings account pays interest, meaning your deposited funds will earn money for sitting in the account. Savings accounts also allow you to benefit from compound interest, where you earn interest on your interest. At the time of this writing, the average rate on a traditional savings account is just 0.39%, according to the Federal Deposit Insurance Corporation (FDIC). Meanwhile, some high-yield savings accounts offer rates topping 4%.

Deposit accounts, including savings accounts, are FDIC-insured. If your bank fails and your funds are lost, FDIC insurance will provide coverage of up to $250,000 per depositor, per ownership category. You don’t need to apply for coverage; it kicks in automatically and will disburse funds to qualifying account holders, usually within two business days.

Earn Money Faster

High-yield savings accounts offer higher interest rates, allowing you to earn money faster compared to traditional savings accounts. This makes them an attractive option for those looking to grow their savings more efficiently.

Your Investment Risk Is Low

High-yield savings accounts are considered much safer investments compared to individual stocks, cryptocurrency, private equity, and hedge funds, which all carry high investment risk. Returns tend to be more modest, but account holders can rest easy knowing their cash reserves aren’t at the mercy of market volatility. FDIC insurance provides additional protection.

Liquidity Isn’t an Issue

With a high-yield savings account, you can expect relatively easy access to your money. Some financial institutions may limit how many free transfers and withdrawals you can make each month, but liquidity generally isn’t an issue. This makes a high-yield savings account a good place to store your emergency fund.

Cons of High-Yield Savings Accounts

Transfers and Withdrawals May Be Limited

Some financial institutions may put a cap on how many convenient transfers and withdrawals you can make in a given month. This can include electronic transfers. The Federal Reserve once required banks to limit consumers to six savings account withdrawals per month, but this rule has been paused since 2020. However, some financial institutions may continue to uphold it or charge fees if you make too many electronic transfers.

You Could Be Missing Out on Higher-Return Investments

Savings accounts aren’t known for being high-return investments. If you’re looking to really grow your wealth over the long term, holding too much in savings could actually work against you. Even the highest APYs lag behind average annual stock market returns, which have historically been around 10%.

Some Financial Institutions Charge Fees

Most high-yield savings accounts don’t charge monthly fees or impose a minimum balance requirement, but that isn’t a hard-and-fast rule. Every bank and credit union is different, which means that fee structures can vary. You’ll also want to look out for penalties for overdrafts or returned deposits. That’s on top of fees they may charge for making too many monthly withdrawals.

How to Open a High-Yield Savings Account

Online banks and credit unions generally offer better interest rates than brick-and-mortar ones. It’s wise to compare different high-yield savings accounts and see how they measure up in terms of fees, restrictions, and convenience. When you’re ready to open an account, you may need to provide your:

• Name and date of birth
• Physical address and mailing address
• Social Security number
• Driver’s license or passport number

Once your account is open, you can set up your online banking credentials and link your new high-yield savings account to your checking account. This will allow for easy transfers and withdrawals in the future. You can also think about the best way to use a high-yield savings account. Aside from housing your emergency fund, you can use it to save for:

• Major purchases
• Big events or life changes
• Child expenses
• Liquid retirement funds
• Travel

The Bottom Line

A high-yield savings account probably won’t lead to huge investment returns, but everyone needs a safe place to keep their emergency fund. Just be sure to clarify if there’s a minimum balance requirement or other fees. Opening a high-yield savings account won’t directly affect your credit—and having cash on hand for financial emergencies might make you less likely to accumulate credit card debt. Meanwhile, resources like free credit monitoring can keep you up to date with what’s on your credit report.

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