2. Interest compounds daily
Most high-yield savings accounts have daily compounding. This means that every day, you’re earning interest on your money, though most banks only deposit that interest into your account once a month. Over the long run, this leads to more cash for you than you’d get if the savings account compounded monthly.
3. Few fees
High-yield savings accounts are almost exclusively available through online banks. These banks don’t have branches and that makes their overhead costs much lower than brick-and-mortar banks’ costs. As a result, online banks are able to offer more competitive interest rates to customers and charge fewer fees.
4. Fairly easy to access your funds
High-yield savings accounts keep your funds within easy reach, so it isn’t too difficult to access them when you need to. That’s why they’re a great home for emergency funds and short-term savings.
5. Online account tools
Since most high-yield savings accounts are offered by online banks, they usually have pretty strong account management tools. These include online portals and mobile apps that enable you to quickly view your account balance, transfer funds, pay bills, and more. Some brick-and-mortar banks lag behind in this area.
6. FDIC insurance
All the best high-yield savings accounts are FDIC insured up to $250,000 per depositor per bank. This means that the FDIC will reimburse you up to this amount if your bank goes out of business and is unable to pay you back.
Four cons of high-yield savings accounts
Here are some of the drawbacks to opening a high-yield savings account:
1. Withdrawal limits
All savings accounts — including high-yield savings accounts — used to charge customers fees if they made more than six monthly withdrawals. This was mandated by a federal law known as Regulation D. The government waived this at the start of the COVID-19 pandemic and it’s yet to reinstate it. But some banks still haven’t changed their ways. As a result, you could face penalties if you frequently move money out of your savings account.
Though the money in a high-yield savings account is fairly liquid, withdrawing it can require some extra steps. Most savings accounts don’t include checks and only a few have ATM cards. Those who need cash often have to transfer money to a checking account first. This can take a few days if the checking account is at another bank.
3. Rates fluctuate
All savings account rates can fluctuate over time. Sometimes, this is good news and sometimes it’s not. But there isn’t much you can do about it either way. That’s why it’s tough to predict how much you’ll actually earn in interest from a high-yield savings account in a given year.
4. Not a good fit for long-term savings
High-yield savings account APYs are much better than the rates you’ll find with brick-and-mortar banks. But often, you still won’t earn enough to keep up with inflation. So even while your bank account balance rises, your buying power decreases.
The only way to avoid this is to invest your long-term savings. While there is a risk of loss with investing, you have the potential to earn much more over the long term. However, you shouldn’t invest short-term savings. If you’re forced to withdraw your funds at a bad time, you may have to take a loss.
Is a high-yield savings account right for you?
Whether a high-yield savings account is right for you depends on what money you plan to keep there. These accounts are a great place for your emergency fund and savings for large purchases you plan to make within the next five years or so. Keeping your money here will let it earn some interest while shielding it from stock market volatility.
You also have to ask yourself how comfortable you are with online banking. If you don’t own a smartphone and aren’t too comfortable using the internet, it may not be the right choice. But if you’re comfortable banking online, you’ll do better with a high-yield savings account than a brick-and-mortar savings account.