Main points:

  • High-yield savings accounts are just one available type of deposit account.
  • High-yield savings accounts often have a high Annual Percentage Yield, (APY) and offer flexible access to funds.
  • Fees may be charged for frequent withdrawals from high-yield savings accounts, andtools may be limited.
  • Most high yield savings accounts have a variable Annual Percentage Yield, (APY), which means it fluctuates with macroeconomic conditions.
  • See your financial professional or banker to know if a high-yield savings account is right for you.

When it comes time to put money away for the future, many consumers consider a savings account, specifically high-yield savings. This type of deposit account is offered by online and brick-and-mortar banks and has many of the same features as a traditional savings account, including a chance to earn more over time.

Learn more about the pros and cons of a high-yield savings account to decide if this particular offering is right for you.

The Benefits of a High-Yield Savings Account

This specific type of savings account can be used to stash cash for a savings goal or emergency. It is also FDIC-insured, which means the Federal Deposit Insurance Corporation (FDIC) covers it up to the maximum amount.

There are other account benefits, too.

Better Annual Percentage Yield (APY)

One of the biggest perks of this account type is its name: a “high-yield” savings account. It’s called high yield because the annual percentage yield (APY) is typically higher than that of a traditional savings account. When choosing between two savings accounts, it makes sense to at least consider the one with a higher APY.

Also, these savings accounts usually calculate and compound interest daily. So, new interest is earned and then goes on to earn its own interest (and so on and so on). Compound interest at this higher percentage rate makes the high-yield account attractive to savers who want to put their money to work with no additional effort.

No Minimum Balance Requirements

Many high-yield savings accounts don’t require a minimum amount to be kept in the account. Account holders who don't have much money to start the account can still open one and earn the benefits of the high-yield APY on the amount they deposit. If the consumer withdraws most of the balance, the account will remain open, even if just a few dollars remain.

No Monthly Service Fees

Unlike some checking accounts and other banking services, high-yield savings accounts are typically fee-free. You don’t need to pay to keep the account open and use it according to the account terms set by the bank. Check the terms of this type of account at financial institutions and verify any requirements and fees before opening the account.

Access to Funds

When money is deposited into a savings account, it’s still accessible to the owner. Taking money out on occasion isn’t a problem, and funds can be accessed in person at a bank or by transferring them to another account.

Some other interest -earning options, such as certificates of deposit (CDs), make it difficult to access the money. There are often penalties for withdrawing the money before the agreed-upon maturity date.

Potential Drawbacks of High-Yield Savings Accounts

As great as this type of account can be under some circumstances, they also have disadvantages. They are savings accounts, so they can prove limited in how much they earn over time. They may not be a substitute for riskier investment accounts or relied on solely for larger goals like retirement.

Withdrawal Limits

As easy as it is to withdraw money from a high-yield savings account, there may be limits to the number of withdrawals allowed per month or year. Going over that limit can incur extra fees. Some banks may even close the account if the withdrawals become excessive and don't meet the terms set by the bank.

Changing APY

While the APY on these accounts may be higher compared to other options, it's not a certainty. Since many high-yield savings accounts have variable rates, the rates will change as the market fluctuates. The Federal Reserve raising or lowering rates affects how much you can earn. As a result, you could be putting money into an account only to see the interest rate fall. 

Banks also set rules on how much savings accounts can earn. They look at market conditions and the Federal Reserve rates to develop their own rates. These may be different than a competing bank at the same time. The only way to know you're getting the best deal, is to ask the bank directly to see if it's in line with your expectations.

Limited tools

Savings accounts are not checking accounts,even if they have similar features. For thatreason, consumers typically won’t find a high-yield savings account with check writing or debit cards. Accessing your money may require a trip to the bank or a transfer to a more accessible account (like checking).

Some high-yield savings accounts come with a card that can be strictly used at ATM machines to get or deposit cash. However, these accounts aren't made to be treated like checking, so features will be limited.

Is a High Yield Savings Account Right for You?

Most consumers use a mix of financial tools to meet their money goals, and a savings account can fit into a plan nicely. A high-yield savings account offers notable benefits, such as a higher APY and the certainty of FDIC insurance. These accounts also keep money within reach whenever you need it, even if the number of times a month you can access it is somewhat limited.

Still, these savings accounts don’t have to replace other deposit accounts, such as checking or CDs. It may be wise to put money into each of these vehicles to meet both short-term and long-term goals while still accessing some of the better market rates.

Talk to a bank representative to learn how to make the most of these accounts. Your representative can clarify any rules around withdrawals and the tools available while confirming the APY at the time of account opening. Since market conditions change so quickly, it may be wise to check in on the same day the account is opened to know exactly what rate will be earned. 

See your banker to learn more about high-yield savings accounts and their role in a well-rounded money mission.