High-yield savings accounts: When does it make sense?

As you consider places to grow your money, the usual suspects may come to mind, like a regular savings account, a certificate of deposit (CD) or a money market fund. These are sound options, but there are more to explore when you're hoping to get the most out of your finances.

A high-yield savings account can offer higher returns than a traditional savings account and is more accessible than a CD. It's another place to consider keeping your mid-term cash.

To learn more about how high-yield savings accounts work, you'll want to compare them with traditional savings accounts, understand their advantages and drawbacks, and consider how they affect your overall financial goals.

In simple terms, a high-yield savings account offers a higher interest rate than traditional savings accounts. That higher interest rate with the power of compounding interest work together to help your savings grow at a faster pace, offering a higher annual percentage yield (APY). This measurement is the percentage rate that reflects the total amount of interest/dividends to be paid on an account based on the interest/dividend rate and frequency of compounding.

Typically, online banks or credit unions that operate primarily through digital platforms offer these accounts. As such, you'll usually have online and mobile-friendly banking options with 24/7 access to your accounts.

You may need to keep a minimum balance to avoid certain fees or to earn interest, but some providers offer accounts with no or low minimum balance requirements.

Unlike high-yield accounts, traditional savings plans are usually run by banks with physical locations. Traditional savings accounts almost always require a minimum balance, another distinction from high-yield plans.

But the big difference is the interest rate—some high-yield accounts offer 10 times the return of a standard savings account. As of January 2024, the national average APY for a standard savings account was 0.47%. This compares to the 4.00% or 5.00% APY possible with some high-yield savings accounts.

To put those numbers in perspective, let's look at a hypothetical example:

• If you deposit $10,000 in a standard savings account with a 0.50% APY, you'd have about $10,050 one year later.
• If you deposit $10,000 in a high-yield savings account with 5.00% APY, you'd have about $10,500 one year later.

For all its attractive features, a high-yield savings account isn't the right fit for every saving situation. Bear these factors in mind:

• Higher interest rates: The primary advantage of high-yield savings accounts is the potential to earn a higher interest rate compared with traditional savings accounts.
• Accessibility: High-yield savings accounts give you easy access to your money through online and mobile banking platforms. Unlike a CD or retirement assets, these accounts let you get your cash when you need it. You can conveniently make withdrawals, transfer money and track your balance.
• Safety: Just like traditional savings accounts, but unlike market-based investments, high-yield savings accounts offered by reputable banks come with FDIC protection. Even if the bank fails, your deposits are insured up $250,000 per depositor, per insured bank.

• Potential for rate changes: While high-yield savings accounts may offer appealing interest rates initially, the rates could change over time. Rates are influenced by market conditions and the policies of the financial institution.
• Online limitations: If your high-yield savings account is offered by an online bank with limited or no physical branch locations, you could be disappointed if you prefer in-person banking services, have limited internet connectivity or need assistance with transactions.
• Possible account restrictions: Some high-yield savings accounts require you to keep a minimum balance or limit the number of transactions you're allowed per month or year. It's essential to review the account terms to ensure they align with your needs.

Generally, high-yield savings accounts are better for short-term goals, letting you boost your current savings while still giving you easy access to your money. For long-term savings, investments like retirement-specific accounts generally hold up better against inflation over time. Let's dig deeper.

• Easy access to your cash: If you're saving for an upcoming vacation, starting an emergency fund or making a down payment on a home in the near future, a high-yield savings account can provide the flexibility to withdraw your money easily when needed. You'll just need to keep any withdrawal limits in mind and plan strategically.
• Stable returns: High-yield savings accounts typically offer a stable and predictable interest rate, providing a secure environment for short-term savings. This can be reassuring when you want to protect your principal.

• More time could equal more money: For long-term savings goals, such as retirement planning, saving for a child's education or building wealth over time, high-yield savings accounts can help you accumulate more money.
• Stay wary of inflation: Be aware that interest rates on high-yield savings accounts may not always keep up with inflation, limiting their long-term utility.
• Diversify your savings: High-yield savings accounts can offer solid returns, but it's important to consider diversifying your long-term savings. Exploring additional investment options like CDs, stocks, bonds or retirement accounts can help optimize your long-term savings strategy.

You'll want to consider your personal banking preferences, financial goals and the services of different institutions before deciding to use a high-yield savings account. But generally, keep an eye out for these considerations during your search:

• High interest rate: Seek an account that offers competitive interest rates compared with other financial institutions.
• Low fees: Look for accounts with minimal or no fees, such as monthly maintenance or transaction fees.
• Little or no minimum balance requirement: If you prefer flexibility, look for accounts with low or no minimum balance requirements.
• Easy account accessibility: Determine if the bank offers a user-friendly online and mobile banking platform that allows you to easily manage your account.
• Solid reputation of the financial institution: Research the credibility of the bank. Look for a well-established institution with a strong track record and FDIC insurance.
• Additional account features: Consider perks that might enhance your experience, such as automated savings tools, goal tracking, a budgeting app or joint account options.

A high-yield savings account can offer tremendous growth potential. But it's likely just one part of an overall financial strategy. A local financial advisor can help you shape a plan that aligns with your personal values and goals while it makes the most of your money.