High-interest savings accounts have gotten a lot of buzz over the last few years. If you’ve been following along, you might be asking yourself: Are high-yield savings accounts worth it? While it’s true that they’re a great place to grow your savings, they may not be the best option in certain cases. Sometimes a checking account, the stock market, or another interest-bearing savings account may be a better bet. So how can you tell if a high-yield account is right for you?
A high-yield savings account is a savings account that allows you to earn compound interest on your funds.
High-yield savings accounts have significantly higher interest rates than traditional savings accounts.
High-yield savings accounts are most useful for building up short-term savings, like an emergency fund or a down payment for a home.
High-yield savings accounts are less useful when your savings goals involve building long-term wealth. They’re also not ideal for everyday banking.
Popular alternatives to high-yield savings accounts include CD accounts and money market accounts.
What is a high-yield savings account?
A high-yield savings account is like a traditional savings account but with one major difference: its APYs (annual percentage yields) are significantly higher.
Let’s look at some numbers to illustrate. With a traditional savings account, you might get an interest rate that’s a fraction of a percentage point. (For example, the Bank of America Advantage Savings account offers an APY of 0.01%.) High-yield savings accounts, on the other hand, usually offer savers much higher rates. Currently, the best high-yield savings accounts offer variable APYs over 4.0%. That’s about 15 to 25 times higher than what you’d get with a traditional savings account.
So, how exactly does that affect your savings? If you put $10,000 into the Bank of America Advantage Savings account and let it sit for three years without making any further deposits, you would earn $5 in that time. That would give you a total of $10,005 at the end of those three years, provided that your interest rate remained the same.
Now let’s see what would happen if you put $10,000 into a competitive high-yield savings account instead. Say you deposited your money in a Betterment account, for example (Betterment currently offers APYs up to 4.0%). Not only would you make more money per year with this rate, but the interest is compounded. That means you make money on your initial balance as well as on your interest earnings. Thanks to compound interest, you would earn $1,272 over three years, provided that the rates didn’t change. In the end, you’d have a total of $11,272 in savings.
Though $1,272 might not seem like much over three years, it’s $1,267 more than you’d have otherwise. Better yet, you didn’t have to do anything other than move your money to a different account.
*Hypothetical scenario, results may vary
While that might seem appealing, it’s important to note that high-yield savings accounts aren’t always worth it. There are certain scenarios in which you’re better off choosing an account that more effectively meets your financial goals. Here’s how to decide if a high-yield savings account is right for you.
Are high-yield savings accounts worth it?
A high-interest savings account can be an easy way to grow your money, but it’s not always the answer. Here are some scenarios to illustrate.
When opening a high-yield savings account may be worth it
When you’re building an emergency fund
Experts recommend having enough cash in your emergency fund to cover three to six months’ worth of expenses. Saving that much can be tough. Though you might be tempted to build your emergency fund via investing, the stock market can be particularly volatile short-term. The S&P 500 may deliver an average return of 11% per year, but that’s just an average. In many years, you could end up with less money than you started with. A high-yield savings account, on the other hand, can help you grow an emergency fund at a higher APY than a traditional savings account can offer — and without the risk of losing it all overnight.
When you’re saving up for a big purchase in the next few years
Just as a high-yield savings account is a great way to build an emergency fund, it’s also a great way to grow short-term savings. That makes a high-yield savings account an ideal way to save for big purchases you intend to make in the next few years.
If you plan to buy a home, for example, a high-yield savings account will allow you to insulate your money from the volatility of the stock market while earning a higher rate of return. It’s a great balance between the safety of a traditional bank account and the ROI (return on investment) of the stock market.
When opening a high-yield savings account doesn’t make sense
When you want to build long-term wealth
Generally, a high-yield savings account will offer a higher APY than a traditional savings account will. Even so, the interest you earn won’t likely be enough to keep up with inflation. So, while your money might grow in a high-yield savings account, the value of the dollar is likely to decrease at an even faster rate than you earn interest. That means it’s not an effective way to build wealth over time. If you’re hoping to save for retirement or your kid’s college fund, for example, you’re better off investing in an account that offers a higher rate of return over time, like a 401k or IRA.
If you want an account for everyday banking
In the past, banks were federally mandated to limit the number of times you could move your money around in a high-yield savings account. They only allowed an account holder to transfer or withdraw money from a high-yield savings account six times per month. Then, in 2020, this federal mandate was lifted, in part to provide financial relief due to the pandemic. While some banks still keep the six-transfer limit in place, others place different limits at their discretion. Your bank may limit you to six transfers or withdrawals — or to 10, 20, or none at all.
If you exceed your bank’s limit, you may have to pay penalties and fees. For this reason, you shouldn’t think of a high-yield savings account as a checking account. Nor should you plan to pay off credit card statements or other regular bills with it. If you use it this way, you may be in for some expensive surprises. Not only that, but high-yield savings accounts don’t come with ATM cards, debit cards, or checks. That means you can’t withdraw money as readily as you would with a checking account, even if you wanted to.
If you want some of the highest APY possible
Though high-yield savings accounts offer higher APYs than traditional deposit accounts, there are accounts that offer even higher yields. While some of the best high-yield savings accounts currently offer 3.0 to 4.0% APYs on your balance, some one-year CD (certificate of deposit) accounts offer upwards of 5.0%. The only downside to a CD is that your money isn’t as accessible as it would be in a high-yield savings account. When you open a one-year CD, for example, you agree not to touch your money at all during that year. If you do make a withdrawal during that predetermined period of time, you risk paying high penalties.
Pros and cons of a high-yield savings account
Still not sure if a high-yield savings account is for you? Here are some of the biggest pros and cons:
High-interest: High-yield savings accounts are interest-bearing, and they offer rates higher than most savings accounts. As of April 2023, the national average APY for traditional savings accounts was just 0.39%. In contrast, many high yield online savings accounts offer APYs over 4%.
FDIC Insured: At banks, high-yield savings accounts are insured by the Federal Deposit Insurance Corporation for up to $250,000 per depositor. At credit unions, they’re insured by the National Credit Union administration. That means that even if the bank fails, the Fed will reimburse you for balances of up to $250,000.
Insulated from losses: In addition to being FDIC-insured, high-yield savings accounts are insulated from the short-term volatility of the stock market. When you deposit money into a high-yield savings account, you can be confident your savings won’t lose value in the way an investment in the stock market could.
Variable rates: Though high-yield savings accounts offer relatively high interest rates, these are “variable” interest rates. Unlike fixed interest rates, variable rates tend to fluctuate based on national trends. (To see how rates are trending currently, you can check out the Federal Funds Rate, a benchmark rate set by the U.S. Federal Reserve.) Variable rates are subject to change at any time. So, while you may see a high-yield savings account advertising a 4% APY, it’s possible that this rate could drop while your money is in the account.
Won’t keep up with inflation: High-yield savings accounts allow you to grow your balance relatively quickly — but likely not quickly enough to keep up with inflation. Over the last few years, inflation has been growing at a rate of around 6%. Top high-yield savings accounts, however, offer APYs of just over 4%.
More requirements than a traditional savings account: High-yield savings accounts may require minimum deposits and/or minimum account balances. If you fail to meet these minimums, you may have to pay penalties or have your account closed. Many high-yield accounts also require monthly fees.
Not as accessible as a money market account or checking account: A high-yield savings account isn’t the place to store money that you intend to use regularly. Some banks may limit you to six withdrawals or transfers per month. If you exceed that limit, you could incur fees.
How to pick a high-yield savings account
A number of big national banks, including Capital One, American Express, and Marcus by Goldman Sachs all offer high-yield savings accounts. There are also a number of reputable online banks that offer high-yield online savings accounts. With so many options, you might be tempted to just pick whichever account has the highest interest rate. But there’s more to it than that. Here are some questions you should ask yourself before you open one.
Required initial deposit: Do you have to make a minimum deposit to open the account? If there is a required minimum, is it an amount you can afford?
FDIC insurance: Is the account federally insured? (Look for “member FDIC” on the account disclosures. This will ensure that your money is protected even if the bank fails.)
Minimum balance requirements: Will you have to keep a minimum amount of money in the account at all times? If your balance falls below this amount, will you have to pay fees or forfeit your account?
Interest rate: Are you being offered a high APY? While APY isn’t the only thing you should look for, it is among the most important.
Fees: What fees are associated with the account? Are there monthly maintenance fees? What kinds of actions will trigger penalties?
Online access: Are you able to bank online? Can you make deposits or transfers via a website or mobile app, or do you have to do it all in person? Is direct deposit available?
Withdrawal limits: Will you be limited to six monthly withdrawals or transfers? Will you have sufficiently easy access to your money if you need it?
Alternatives to a high-yield savings account
High-yield savings accounts aren’t for everyone. Here are some alternatives worth considering.
A money market account
A money market account (MMA) is similar to a high-yield savings account in that it offers the depositor a higher interest rate than a traditional savings account. MMAs are also lower-risk than most investment accounts.
Unlike high-yield savings accounts, though, money market accounts usually come with ATM cards and check-writing privileges. In essence, they're like a hybrid between a checking account and a high-yield savings account. MMAs typically offer higher APYs than traditional bank accounts, but they give you easier access to your money than high-yield savings accounts do.
A CD account
A CD account is another type of savings account that pays interest on your deposits. When you open one, you agree to leave your money in the CD for a specific period of time — anywhere from three months to five years. During that time, you cannot withdraw your funds or transfer them elsewhere.
In return, the bank will pay you interest on the amount you've invested. This interest rate will be higher than what you would earn with an ordinary savings account, and likely higher than what you’d get with a high-yield savings account, as well. That’s because banks know they can count on your money during this period. They can use it as collateral for loans or investments they’ve made with their own funds. Because this is valuable to the bank, they’re willing to offer you a higher rate of return. What’s more, the interest rate on a CD is fixed. This offers more stability than the variable interest rate you’d get with a high-yield savings account.
Explore savings accounts on Navient Marketplace
You can open a high-yield savings account at most financial institutions, including brick-and-mortar banks, online banks, and credit unions. However, it’s not always easy to see all your options in one place. That’s where Navient Marketplace comes in. A vast online platform showcasing tons of available financial products, Navient Marketplace is a one-stop shop for all your personal finance needs. It’s also completely free to try out. You can research your options, compare and contrast banks, and pick the one that best suits your financial goals.