Online banks that offer high-yield savings accounts usually have low fees. Most High Yield Savings Account owners won’t pay anything to open an account, and they won’t have to maintain a certain balance to avoid maintenance fees. Due to these factors, you should only make money with one of these accounts.
Funds in High Yield Savings Accounts are FDIC protected up to $250,000 per depositor per bank. This means that even if the bank fails, you won’t lose any money as long as you stay below the FDIC insurance limit for your account.
Disadvantages of a High Yield Savings Account
Here are some disadvantages of high-yield savings accounts that you should be aware of:
Withdrawing money from a savings account is not as easy as withdrawing money from a checking account. Most savings accounts don’t include debit cards or check-writing capabilities, and some banks charge customers for making more than six monthly withdrawals. This was once required by a federal regulation known as Regulation D. The government waived this during the pandemic, but some banks are still imposing these penalties.
Working with an online-only bank also poses unique challenges in accessing your funds. There are no branches to visit, so you usually need to transfer money to a checking account before you can withdraw money. If your checking account is at another bank, you will have to wait a few days for the funds to be transferred.
The APY on any savings account can change without warning. Sometimes they can go up, but other times they can go down. Lower rates could mean less interest earned for you. You can’t do much except wait for rates to go up or switch banks.
Not ideal for long-term savings
Although the rates on a high-yield savings account are much better than what you can get with most brick-and-mortar banks, they probably won’t beat inflation for most years. So while you are making money, you might be losing buying power. That’s why investing is usually the best choice for money you don’t plan to spend in the near future.
When to use a High Yield Savings Account?
A high-yield savings account is a great place to keep the following:
You never know when you’ll need to dip into your emergency fund, so you want to keep that money where it’s fairly easy to access. If you invest your emergency fund savings, you may be forced to sell at a loss. But you won’t have that problem with a high-yield savings account.
If you’re saving for a major purchase in the next five years or so, a high-yield savings account is a better investment for your money than a brokerage account. The stock market can be volatile in the short term. By sticking to a savings account, you ensure that you don’t lose money due to market fluctuations.
Alternatives to a High Yield Savings Account
If a high-yield savings account isn’t right for you, one of these accounts might be a better fit for you:
Checking accounts give you several ways to access your money, including debit cards and check writing capabilities. It’s the best choice for day-to-day expenses, but it’s not a great place to save. Most don’t offer interest and those that do usually have low APYs.
Money market accounts
A money market (MMA) account offers interest, similar to a savings account, but often includes one or more ways to withdraw your funds directly. MMAs aren’t as common as the other types of bank accounts listed here, and some may require a high minimum balance to open an account.
Certificate of Deposit (CD)
A certificate of deposit (CD) is another way to earn a higher than average rate on your savings, but you should be prepared to lock in your funds for a period of time. This can range from a few days to several years, depending on the CD you choose. If you withdraw your funds early, you risk penalties. So it’s only a good idea if you don’t plan to use your money before the end of the CD term.