Advantages and Disadvantages of High-Yield Savings Account

A High-Yield Savings Account is a popular choice for anyone looking to put some money away for future use. These high-performing accounts deliver a higher annual percentage yield (APY) compared to traditional savings accounts — some at rates higher than 5%, which is more than 20 times the 0.24% average APY offered by traditional savings accounts.

Although there are a few disadvantages to high-yield savings accounts, the advantages usually outweigh the disadvantages if you need to build an emergency fund, save towards a down payment for a car or house, or pay for a wedding or vacation.

Here is a detailed look at the pros and cons of high-yield savings accounts.

What Is a High-Yield Savings Account?

A High-Yield Savings Account (HYSA) is a deposit account that pays a significantly higher annual percentage interest rate (APR) than a standard savings account. As of mid-2024, high-yield savings accounts frequently offered APRs of 4% and higher. Some offered 5.55%. In contrast, the average APR on savings accounts was 0.45%, according to the Federal Deposit Insurance Corp. (FDIC).

Other than their higher income-generating capacity, HYSAs function similarly to standard savings accounts. You deposit money, earn interest on your balance, and withdraw your money when you want.

Various financial institutions offer these high-return accounts to customers, but online banks are an easier place to find them.  Because these non-brick-and-mortar institutions don’t have the overhead costs of running physical bank branches, they can pass on these savings to customers as lower fees and higher interest rates.

Some credit unions and traditional banks also have these accounts, mostly through their online divisions.

Advantages of High-Yield Savings Accounts

While the chief advantage of HYSAs is obvious, they have other advantages that make them attractive. Their higher interest rates also benefit from the security and liquidity of traditional savings accounts.

The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Association (NCUA) insure up to $250,000 per account in case of a bank failure.

The four major advantages of high-yield savings accounts are:

• Higher interest rates
• Safety and security
• Liquidity and accessibility
• Low risk

The ability to withdraw your money at almost any time — your liquidity — is another benefit, as is the fact that the accounts are low-risk Despite their high yield, the accounts carry little risk, so account holders carry virtually no risk of losing their account balance.

Higher Interest Rates

Despite the multiple advantages, interest rates are the biggest driver for account holders. Banks typically provide rates that are 10 to 20 times higher than what traditional savings accounts have. This allows your money to work harder for you.

Compound interest at a higher rate makes HYSAs so attractive. Banks calculate interest gains daily, then credit gains to your account every month. Last month’s interest payment adds to your principal amount, and next month your higher principal generates even more money.

Safety and Security

As your money grows, it enjoys insurance up to $250,000. The FDIC and NCUA protect any money that sits in accounts at banks and credit unions, respectively. That protection extends to funds that sit in traditional savings accounts and in high-yield accounts.

You do not need to apply for this safety net coverage. The insurance usually kicks in automatically within two business days. It covers up to $250,000 per depositor, per institution, per ownership category. However, the insurance does not cover losses from fraud or theft.

Liquidity and Accessibility

Even though your money generates more revenue in a HYSA compared to a regular savings account, you still enjoy liquidity in your account — the ability to access your money whenever you need it. Sometimes, however, you are restricted.

Some financial institutions limit how many free transfers and withdrawals you can make in a day, a month, or a quarter. In fact, most online banks that offer high-yield accounts provide online platforms or mobile applications (apps) that make it easy to manage your account. Some offer ATM cards.

Also, most banks offer instant transfers between accounts in the same institution, while transfers from HYSAs to external accounts take 1-3 business days. This ease of access to funds makes HYSAs an excellent option for emergency savings or short-term goals, like a down payment on a car or vacation.

Low Risk

High-yield savings accounts provide a safe way to earn interest. This safeness contrasts with other investments, such as individual stocks, cryptocurrency, private equity, and hedge funds, all of which are subject to stock market volatility. Although your returns are more modest compared to stock investment, you can rest easy knowing that the FDIC or NCUA protects your principal and that you’re guaranteed to earn interest.

Overall, the higher interest rates and low-risk levels make high-yield savings accounts a wise place to park emergency money and earn short-term savings goals as part of a diversified financial strategy.

Disadvantages of High-Yield Savings Accounts

As wonderful as high-yield savings accounts are, they have certain disadvantages. The big ones are:

• Fees and account requirements
• Limited number of transactions
• Lower returns compared to investments
• Variable interest rates

Fees and Requirements

Monthly or annual fees are the biggest negative for any bank account, and the same is true for these high-earning accounts. The good news is, that most high-yield savings accounts don’t charge monthly fees, nor do they have minimum balance requirements.

But that’s not true for every bank or credit union, some of which have qualifying conditions for opening and keeping accounts like this. If you don’t meet the conditions, the institution could assign you a lower interest rate or levy end-of-month fees, lowering your earnings.

Some institutions require that you maintain a specific minimum balance, say at least $5,000 each month, or have a checking account, to avoid fees. Others may require you to receive e-statements instead of paper statements to avoid fees.

You’ll have to decide what your deal-breakers are for opening or keeping an account at banks that have more rules.

Limited Transactions

Another major disadvantage is that HYSAs often come with a limit on the number of times you can transfer or withdraw funds from your account. That’s because Federal Regulation D mandates this policy, which restricts withdrawals to six per month.

Although the federal government waived this restriction in 2020 during the COVID-19 pandemic and has yet to reinstate it, many financial institutions continue imposing their rules and limits.

If you exceed your limits, the institution usually charges fees for each extra transaction. If you go over the limit consistently, your bank might convert your savings account to a checking account or even close it.

Although these policies encourage saving and help institutions manage their reserves, they can be inconvenient if you need to access your money frequently. Learn the specific policies your financial institution has before opening a high-yield savings account with it.

Variable Interest Rates

Although high-yield savings accounts have attractive interest rates, rates are always variable. They can change at any time. Banks lower (and raise) rates based on stock market conditions and on where the Federal Reserve Bank sets the prime interest rate. When the Fed changes the prime rate, which is what banks charge each other for borrowing money, it directly affects the interest rate on your account — and how much you can earn each month from your savings.

Banks consistently assess market conditions and make bank-wide decisions based on their conclusions. That’s why bank rates, even on high-yield savings accounts, vary so widely from bank to bank and why it’s important that you shop around for the best account before you open your high-yield savings account.

Lower Returns Compared to Investments

HYSAs will earn you more money than traditional savings accounts. But savings accounts aren’t investments. When compared to other investment options, such as stocks, bonds, index funds, and mutual funds, these accounts generate considerably lower long-term returns.

The average annual stock market returns, which have historically been around 10%, dwarf returns of accounts that have even the highest APYs of around 5%. So, keeping too much money in any savings account, including a high-yield account, is usually counterproductive if you want to grow your money over the long term.

The best approach is to have a healthy mix of investments across a range of asset classes. This way, you have the potential to build serious long-term wealth while benefiting from high-yield savings in the short term.

Is a High-Yield Savings Account Right for You?

To determine if a high-yield savings account is right for you, assess your short- and long-term financial goals, your need for liquidity, and your tolerance for risk.

HYSAs are particularly useful for a couple of financial purposes:

• Building emergency funds: The combination of higher interest rates and fast access to your money lets you grow money and have it available for unexpected needs. Many financial advisors recommend keeping 3-6 months of living expenses as an emergency fund.
• Building short-term savings: These accounts are also ideal for saving for an upcoming vacation, a major purchase, or a planned down payment for a car or home. You can grow your money steadily without exposing it to significant risk.

Note that even with the account’s higher interest rates, it probably won’t outpace inflation long term. If you want to maximize returns and can take on more risk, consider other investments, such as stocks and mutual funds.

If you need help with a deeper evaluation of whether high-yield accounts fit your needs, use one or more financial tools to help.

Harvesting Your Savings Potential

High-yield savings accounts offer an interesting combination of higher interest rates, liquidity, and safety that benefit many savers. They provide an excellent way to generate more income from savings compared to traditional savings accounts.

There are several ways to make the most of these accounts. They include:

• Compare multiple accounts from various banks and credit unions
• Develop an understanding of all fees and requirements to avoid extra charges
• Use your account as part of a broader financial strategy
• Watch the fluctuation of interest rates and resulting changes in your account’s rates

By having a clear understanding of the advantages and disadvantages of high-yield savings accounts, you can make decisions that make sense for your financial goals.

Ultimately, a high-yield savings account can grow your savings safely and fast.

But before you open an account, consult a financial advisor to determine how this account fits into your master financial plan.