If you are looking for a low-risk way to grow your savings, you might want to consider a high-yield savings account. These FDIC-insured bank accounts offer higher interest rates than standard savings accounts, and could be one of the best places to stash your emergency fund or set aside money for this year’s home renovation or holiday travel plans.
That said, high-yield savings accounts aren’t your only option, especially if you’re thinking about longer-term financial goals like retirement savings. That’s why we asked James Allen, CPA, CFP®, CFEI and founder of Billpin.com, about the pros and cons of high-yield accounts.
“Think of a high-yield savings account as a greenhouse for your money,” says Allen. “Just as a greenhouse provides an optimal environment for plants to grow faster than they would in the wild, a high-yield savings account offers a higher interest rate than a traditional savings account, allowing your money to grow at an accelerated pace.”
Want to know more about the benefits and limitations of high-yield savings? Keep reading.
What are the benefits of a high-yield savings account?
A high-yield savings account offers higher interest rates than a traditional savings account. As of this writing, the best high-yield savings accounts offer as much as 5% APY, allowing your savings to grow much faster than they might in a standard savings account.
“The pros of a high-yield savings account are similar to the benefits of a greenhouse,” Allen explains. “The interest rates outpace the return you’d earn while keeping your money in a traditional bank savings account.”
If you had $5,000 in a high-yield savings account with 5% APY, for example, you could earn $250 in interest by the end of the year. A traditional bank savings account might only offer 0.15% APY, which would only yield $7.50 in interest. Of course, the real magic of high-yield savings takes place when you allow your interest to compound, year over year. And if you are able to save more money every month, you could see even more growth.
What are the limitations of a high-yield savings account?
While high-yield savings accounts are excellent places to deposit your savings, you should know the pros and cons before opening an account.
“Just as a greenhouse has its limitations, so does a high-yield savings account,” says Allen. “The interest rates are variable and can fluctuate at any time—and while a high-yield savings account allows you to grow your money without the risks associated with the stock market, the interest you earn on a high-yield savings account might not outpace inflation.”
You should also be aware that you might not be able to access your savings as often as you’d like. “Your savings are accessible, but only up to a certain number of withdrawals before you’re hit with a fee,” Allen explains. Some high-yield savings accounts have minimum deposit amounts, and others require you to maintain a certain deposit amount in order to earn interest at the highest available rate.
High-yield savings accounts also pose potential problems to people who want to withdraw their savings in cash. “Most of the online high-yield savings account banks don’t have a physical bank location,” says Allen. “And while some savings accounts offer ATM cards for easy withdrawals, not all online banks do.”
Is a high-yield savings account a good place to put your money?
If you’re looking for a low-risk way to earn high interest on your savings, a high-yield savings account could be one of your best options. “Your money is safe, FDIC-insured up to $250,000, and accessible if you ever need to tap into it,” says Allen.
High-yield savings accounts are good places to put your emergency fund, as well any as money you plan to use in the next few years. If you’re looking for other low-risk savings options, you may also want to consider putting your savings into a money market account or a certificate of deposit (CD), both of which could offer higher interest rates than what you might get from high-yield savings.
If you have a higher risk tolerance and can afford to ride out market fluctuations, you may also want to consider investing in target-date retirement funds or total market index funds. These kinds of investments are designed for people who are planning for long-term financial goals and want to maximize their financial growth.
You might also want to work with a roboadvisor to build the kind of diversified portfolio that could outpace inflation and help you prepare for your future financial needs. You may even be interested in impact investing options like investing for racial justice or investing for a sustainable climate.
It all depends on what you hope to get out of your savings, and what risks you’re willing to take.
