Pros And Cons Of High-Yield Savings Accounts

High-yield savings accounts are powerful savings tools, primarily offered by online banks, that will earn you more interest than traditional savings accounts.

But, while the idea of passively earning extra dollars in your savings sounds appealing, there are downsides to keep in mind. Here are the pros and cons of high-yield savings accounts.

Pros Of High-Yield Savings Accounts

Superior Interest Rates

High-yield savings accounts pay a higher APY than other savings products. The online banks that offer them can pay their depositors higher interest than traditional brick-and-mortar banks because they don’t have costs associated with maintaining physical branches. They in turn give this back to their depositors in the form of paying higher interest rates.

Little to No Fees

High-yield savings accounts also typically have little to no fees. Some traditional savings accounts may have activity fees, minimum balance fees (plus balance requirements to waive the fees) or regular maintenance fees. However, most high-yield savings accounts do not charge fees, making them a great way to save money.

Low Investment Risk

Your risk is low with high-yield savings accounts since they aren’t invested in the stock market. The growth in your account is purely the interest that compounds daily and credits monthly. But, if you open your account with a reputable bank, your deposits will also be FDIC Insured up to $250,000 (per depositor, per relationship type, per institution) meaning your money is protected from loss in the unlikely event the bank collapses.

Liquidity

Unlike other higher yielding savings products like certificates of deposit, which are term-fixed, you have the ability to transfer and withdraw your money from a high-yield savings account at any time, virtually without penalty. Many will not even require you to maintain a minimum balance. This liquidity can be quite handy in the event you need quick access to your money.

Cons Of High-Yield Savings Accounts

Limited Physical Branches

Since most high-yield savings accounts are offered by online banks, you may face hurdles when you need fast access to cash. Transfers to external banks can take up to one or two business days, and your ATM access may also be limited. Even if you do find an ATM within the network, you may have to pay fees to get your cash.

Limitations on Transfers and Withdrawals:

Some banks may limit your withdrawals and transfers to a certain number, typically six per statement cycle. Formerly known as Regulation D, the Federal Reserve implemented this regulation to ensure banks can meet reserve requirements and actively discourage the use of savings accounts like checking accounts.

But, during the height of the COVID-19 pandemic in 2020, Reg D was suspended allowing consumers more access to their funds in the time of crisis. While the limitations were later permanently paused in 2022, banks were still given the right to impose withdrawal limits and charge excessive withdrawal fees, too.

Variable Interest Rates

Interest rates tend to be aligned with the federal funds index and will usually change depending on the current market conditions. So, unfortunately, you aren’t always guaranteed the higher APY that drew you in. Introductory rates can also drop off after the initial introductory period, defaulting to lower rates.

Not Ideal For Long-Term Growth

While high-yield savings accounts are great tools for housing your emergency fund or your savings for a major purchase, they aren’t ideal for long-term growth. The returns you see from the markets will almost always be higher on average, meaning if you want to yield some good returns long-term, look outside of high-yield savings.

It’s best to keep your emergency fund of three to six months of living expenses and any other short-term sinking funds in a savings account—but stash your excess money elsewhere.

How To Open A High-Yield Savings Account

While there are a few drawbacks to high-yield savings accounts, the pros may outweigh the cons to you. So, if this is the case and you want to open one, there are some simple steps to take:

• Do some research: There are many high-yield savings accounts, so you will want to do a little bit of initial research to determine which one is best for you. The best high-yield savings account for you will depend on what is personally important to you. Want the highest interest rate possible? How about no fees, superior customer service and access to other products? What about the bank’s reputation? These are things you should ask yourself during your research.
• Gather necessary documentation and personal information: You will need to present your personal information to apply for any bank account. This includes your government-issued photo ID, Social Security number, physical address, date of birth, phone number, and other personal information like your email address, bank-defined security questions and mailing address (if different than your physical address).
• Determine the ownership of the account: Next, you will decide if you want to open the account solo or add a joint owner, like a spouse, child or parent, to the account. If you decide to add a joint owner, be prepared to produce their personal information and documentation too.
• Submit your application: Once you’ve filled the forms to completion and read the fine print, you will submit your application. You should receive the news if you’ve been approved pretty quickly. If you are rejected, you can likely expect a written notice mailed to you within a few weeks with details of your rejection.
• Fund your new account: You’ve been approved! The next steps are to fund your account and start making money off your savings. Typically banks give you a few options to fund, including authorizing them to initiate an ACH transfer or writing a physical check. You may be able to deposit the check you wrote via mobile remote capture, or you may have the option to mail it in.

It’s a straightforward process to open an account, and sometimes the best way to see if high-yield savings accounts are worth it is to test it for yourself. There’s little risk involved after all, so why not see what the hype is about?