Pros and Cons of High Yield Savings Accounts: Are They Worth It?

By definition alone, the high yield savings account sounds so appealing it begs the same question you might ask upon getting your dream job for twice the salary you expected: What’s not to like?

But while there are clear positives to putting money into an account that maximizes return while limiting risk, the high yield savings account (HYSA) works better for some situations than others and may carry restrictions that affect the bottom line.

That’s why it’s important to first examine the pros and cons of high yield savings accounts to see how they line up with your financial objectives.

“I am primarily recommending high yield savings accounts as a low risk place for retirees and older investors to store cash,” Chris Urban, Founder of Discovery Wealth Planning, said. “Given the current interest rate environment, high-yield savings accounts are a good, safe place to keep cash and earn a reasonable amount of interest.“

What Are High Yield Savings Accounts?

High yield savings accounts offer a higher than typical annual percentage yield (APY), allowing account holders to grow their money faster.

Some HYSAs compound interest daily, others do so monthly. The difference is negligible in many cases. What’s more important is the interest rate and the amount of time you let the account grow.

Unlike traditional savings accounts where the interest rate is fixed, the rate offered in high yield savings accounts is variable. A typical interest rate on a traditional savings account is less than .50%. Meanwhile, high yield savings accounts can earn 4%-5%. While that rate can go down, the FDIC insures high yield savings accounts up to $250,000.

Pros of a High Yield Savings Account

High-yield savings accounts are a safe, secure place to put your money, but they are not for everyone and not every HYSA  is created equal.

The advantages of high yield savings accounts – higher interest rates, compound interest, lower risk than stock market options, easier access than CDs,  low fees – make them an ever popular choice for individuals who want their savings to work harder for them.

High Interest Rates

The average savings account rate across all financial institutions in the first half of 2024 was 0.46%. When you consider the most attractive high yield savings rates currently range from 4.50% to 5:30%, it’s easy to recognize the No. 1 appeal of HYSAs.

Even keeping in mind that the rate you start out with is not guaranteed because APYs fluctuate in accordance with the Fed rate, high yield accounts are an attractive way to save money faster.

Compound Interest

The best way to understand compound interest is that you not only earn interest on the money you save in an account but also on the interest that money accrues.

Investor.gov has an online calculator that allows you to assess the advantages of compound interest. You just plug in the initial deposit amount, the amount of your monthly contribution (if any), the interest rate and the frequency of compounding interest (daily, monthly.)

A $1,000 initial deposit and $100 monthly contribution amounts to $2,200 over 12 months. At 5% interest compounded monthly, your account would grow to $2,279.05 in a year’s time. In a traditional savings account offering  0.50%, your $2,200 investment would only be worth $2,207.77.

Save Money Faster

Obviously, because of the higher interest rates and compound interest earned, high yield savings accounts grow money faster than other savings accounts.  Provided, of course, you don’t keep tapping the account to pay for other things. (Maybe you really don’t need that Sharper Image fantasy jellyfish planetarium?)

High yield savings accounts can help people save for that destination wedding their niece and her fiancée are planning for Belize, expenses associated with having a baby, saving for a mortgage or simply establishing emergency funds.

Low Risk Compared to Other Accounts

Tolerance for risk is a determining factor in how people invest, but not really an issue with HYSAs. High yield savings accounts aren’t the best choice for long term growth or for investors in search of the highest returns, but they are one of the least risky options.

Not everyone who is starting to save money has a financial advisor or is comfortable investing in the market. High yield savings accounts might appeal to someone new to investing who has a specific financial goal for that account and who can’t afford to lose money in the short term.

Easily Accessible & Online

High yield savings accounts are available through most banks. You may already have received a call from an account executive where you bank suggesting HYSAs as a better option for savings based on the balance in your account.

Online banks typically offer the highest interest rates on high yield savings accounts. You can open an account in minutes online and it’s easy to check the status and manage the account from the comfort of your own home.

FDIC Insured

You’ve seen news stories about banks failing. It’s not common but it happens. So, it’s comforting to know high yield savings accounts are FDIC-insured for up to $250,000.

If your bank closes, you won’t lose your money.

Low or No Fees

High yield savings accounts typically have fewer fees than traditional bank accounts, which often charge account holders a small percentage in maintenance fees.

Just keep in mind that every bank and financial institution is different, and some may charge a small fee for transactions over an allowed monthly number.

Do your homework.

“There are many well-known banks and companies that offer high yield savings accounts that can be found with a simple internet search,” Urban said. “Of course, each of them will have their own rules which anyone should understand before opening an account and contributing to it.”

Cons of a High Yield Savings Account

Higher interest rate. Check. Lower risk. Check. Easy access to your money. Check. So, what’s the catch?

While high yield savings accounts offer many advantages over traditional savings accounts, there are downsides to consider.

Interest Rates Are Variable

That interest rate that caught your attention, the one several times greater than your brick-and-mortar bank savings account? It’s variable, not fixed. It could go down on the whim of a Federal Reserve vote.

Rates that fluctuate with the market could mean a lower return than expected depending on economic variables.

Possible Transaction Fees

It’s important to know there are different types of financial institutions that offer various savings and loan opportunities.

Some banks offering high yield savings accounts may charge for transaction fees, such as overdrafts.

Some might restrict the number of monthly transactions (six is a typical number). Look for accounts that don’t carry monthly fees and require low, or at least lower, initial deposits and minimum balances.

Minimum Balance May Be Required

Depending on the bank, a minimum balance may be required to open a high yield savings account, at least at the highest interest rate.

Many HYSAs are tiered, meaning the higher the minimum balance you keep the better the interest rate on your account. On some accounts, keeping the required minimum balance could also eliminate maintenance fees.

May Be Missing Out on Higher-Return Investments

Some high yield savings accounts offer an interest rate nearly 10 times higher than what your money would earn in a regular savings account.

But there are many other investment options available that promise a greater return than the 4.8%-5.5% variable rate you might get to open a high yield savings account.

For example, CDs, money market funds or mutual funds might offer a better return, but better returns often come attached to more risk. When you assess your financial goals, do yourself a favor and learn about the do’s and dont’s of investing before making any decisions.

Best Uses for a High-Yield Savings Account

High yield savings accounts not only offer a higher interest rate (albeit variable) but also offer more transaction flexibility than many CDs and money market funds.

While they aren’t a one-size-fits-all way to meet all your financial goals, high yield savings accounts can be especially effective in saving for certain situations involving short term financial goals, debt payments or saving for a mortgage or large purchase. They might be an easy first step into investing for people concerned about taking on too much risk.

Short-Term Financial Goals

High yield savings accounts are tailored for smaller financial goals that you want to reach sooner than later.

An example might be saving for that new roof you expect to need in the next year or two, or starting a simple “home repair fund.” (As homeowners of any experience know, there’s always something that needs fixing.)

Another good example is vacation planning. If you happen to have a “go to” destination you visit annually, and the cost is relatively fixed (inflation aside), a high yield savings account is a good way to cover it by making monthly deposits over the course of the year.

Debt Payments

Vacation planning is the fun part. At the opposite end of the spectrum, a high yield savings account is a smart way to save money towards paying down debts or that semi-annual tax bill that always seems to sneak up on you.

Not only can you save money faster but you can easily access the money you put into a high yield savings account to pay bills. So many Americans struggle with how to get out of debt. Used properly, a high yield savings account can be another effective tool in achieving financial health.

Saving for a Large Purchase

Building up savings for a mortgage, car or other large purchase isn’t easy but a high yield savings account is a good way to hit the gas pedal in the process.

One added benefit is easy access to your money, provided you don’t nullify the benefits with too frequent withdrawals. For instance, you are saving for a car and see a deal that is just too good to pass up. Your money isn’t tied up in a high yield savings account like it could be in a money market or CD.

“If you may need access to your funds then I have a strong preference for the high-yield savings account versus something like a certificate of deposit (CD),” Urban said. “There are, however, some “no penalty CDs” which may give you greater access to your funds if you need it but generally I am comfortable with the variable interest rate offered on the high-yield savings account with immediate access to cash if needed versus the (potential) lockup of funds in a CD.”

The Takeaway

High yield savings accounts have many advantages for sure, but also a few disadvantages as well.

The pros and cons of high yield savings accounts depend on your financial goals and specific needs regarding access to your money and the amount of time you can let your account grow.

Getting out of debt or dedicating yourself to saving money in a high yield savings account for rainy and sunny days alike is doable with some planning.

Take advantage of available educational resources such as:

• Building an Emergency Fund
• Managing A Budget
• 7 Habits That Will Help You Become Rich
• Pay Off Student Loans or Invest?