Are High-Yield Savings Accounts Worth It?

Americans who use their checking accounts for savings may be missing out. Not all accounts that hold money are the same, as rates can vary.

According to an August 2020 survey by NextAdvisor, only 21% of banked adults used high-yield savings accounts offered by traditional banks and online banking to store their savings.  

The majority of savers use checking accounts to hold their savings. If you’re part of the 45% of people who do this, it may be time for a bank account upgrade. Checking accounts don’t accrue much -- if any -- interest, so it doesn’t make sense to keep money there you don’t plan on using for regular spending.

How do savings accounts differ from high-yield savings accounts?

High-yield savings accounts typically have higher interest rates than traditional savings accounts.  APYs -- or annual percentage yields, which is the amount of money an account will earn in a year -- can fluctuate depending on the state of the economy.

Even when interest rates are at a low, a high-yield account will earn you more interest than most traditional savings and checking accounts.

For example: If you had $800 in your traditional savings account, after a year, you’d earn about $800.48 with a .06% interest rate, the national rate set by the Federal Deposit Insurance Corporation. Compared to a high-yield savings account, with an average interest rate of 1%, you’d earn $808 after a year. While $8 isn’t a huge return, it’s more than 16 times better than the $.48 you’ll earn with compound interest.

How are interest rates determined?

The Fed shifts interest rates depending on the needs of the economy. Low rates encourage consumer spending instead of saving. In 2020 the Federal Reserve cut interest rates severely to dampen the economic fallout caused by the coronavirus. Rates are expected to pick up when the economy recovers.

“In the current environment, rates have been pushed down to zero to prevent the economy from going into a deep recession,”says Larry Solomon, client advisor for Mercer Advisors. “A big advantage of high-yield savings accounts is they provide some amount of return, the highest you can get for cash.”

Like checking and savings accounts, the FDIC insures high-yield savings accounts up to $250,000 per depositor, which means if the banking institution fails, the government protects your money.

What are high-yield savings accounts used for?

When interest rates are low, your money isn’t accruing a lot of interest sitting in a checking or savings account. It’s losing value due to inflation.

“Savings accounts are a way to preserve your money and give you access to it, but they’re not a good way to grow your money,” says Greg McBride, CFA, senior vice president and chief financial analyst for Bankrate.com.

However, you still need somewhere to store money for emergencies or unexpected expenses. High-yield savings accounts can be an option to hold your emergency fund or used as a short-term savings vehicle for a vacation, holiday spending, or a down payment on a car.

“Everyone needs emergency savings,” McBride says. “The best place to put it is in an account with no risk of loss, where you can access it at any time, and you can earn a return that at least gives you a shot at keeping pace with inflation.”

People may be hesitant to invest because of the recent volatility and instability of the market. High-yield savings accounts are generally low risk. If you’re looking for a safe way to store your money, high-yield savings accounts can be an option as these accounts are available to just about everyone. They don’t require a specific credit score or financial profile.

If you want your money to grow faster, you’ll need to invest in a higher-return financial product. For this reason, high-yield savings accounts shouldn’t be used as a replacement for long-term goals, such as retirement or a child’s college fund.  

“Cash never keeps up with the rate of inflation,” Solomon says. They’re not the best for growing your money.”

How do high-yield savings accounts work?

Online banks, traditional brick-and-mortar banks, and credit unions offer high-yield savings accounts. These accounts give people a secure and easy way to access their cash while accruing more interest than a traditional savings account.

“If you find other opportunities and want to move your money elsewhere, you can move your money easily,” says Solomon. “If your money is in a certificate of deposit, treasury bond, or money market account, that’s not always the case.”

For the most part, these accounts are accessible to everyone. Consumers just need a Social Security number, personal identification information, and internet access to open an account.

Having an excellent credit score typically isn’t a factor for opening up a high-yield savings account. If you have negative information on your ChexSystems report, which keeps track of your banking activity, it may be a factor in account denial.  

Considerations for choosing a high-yield savings account

High-yield savings accounts earn you more interest than traditional savings accounts while providing flexibility. Depending on the bank, high-yield savings account interest rates and terms can vary vastly.

“You can generally have access to your capital with a high-yield savings account at a good rate without locking up your money,” says Paul Miller, CPA, managing partner at Miller and Company.

You’ll want to fully understand the terms, conditions, and potential fees before opening an account and putting money in it. Compare and research the best savings accounts to find the one with the highest rate for your savings goals. Here are four factors to consider when opening a high-yield savings account:

No. 1: Fees

There’s no standard when it comes to fees for high-yield savings accounts. Some banks may have monthly maintenance fees, but this will vary. Banks may also charge you fees for withdrawing money, wire transfers, or overdrafts.

No. 2: Interest

One of the biggest perks to a high-yield savings account is a higher APY than a traditional savings account. Interest can be accrued daily, weekly, monthly, or annually. To entice customers to sign up for new accounts, some banks will have teaser rates that may pay a higher rate of return for a period of time and then give you a 0% return after the introductory period.

No. 3: Terms

High-yield savings accounts aren’t the same as checking accounts when it comes to withdrawing and depositing money. Before signing up for any bank account, read the fine print to know if there’s a required initial deposit, monthly minimum balance requirements, or limited transactions.

No. 4: Accessibility

The rise of online banking has given consumers more options when it comes to saving. If you opt for an online savings account, you won’t be able to walk into a physical branch bank location and withdraw money instantly. It’s important to make sure you have access to cash if you need it in a crunch. Some of the best high-yield savings accounts with the most favorable savings account rates are from smaller online banks instead of bigger national brick-and-mortar banks. If you open a high-yield online savings account, find out if there is access to an ATM network that will spare you from fees when withdrawing or depositing money.

The bottom line

If you decide to put your money into a high-yield savings account, make sure it’s an FDIC-insured bank or credit union to avoid fraud.

“Always check the information to make sure you’re using a legitimate bank,” Miller says. “If the rates look too good to be true, call the FDIC to check. Make sure you know what you’re signing up for, so you don’t get scammed.”

For easy access to your cash without a long-term commitment, while still gaining a rate of return, high-yield savings accounts may appeal to you.

Paul Miller, CPA is a driven individual and a tireless businessman with more than 30 years in the accounting industry. He has a bachelor’s in science from St. John's University opened his own accounting office in 2002. Since then, Miller & Company LLP has grown to a staff of more than 25 employees and services approximately 3,000 clients.

Greg McBride, CFA, is senior vice president, chief financial analyst for Bankrate.com. He has appeared on hundreds of national cable and network TV broadcasts, is routinely quoted by major media outlets, and is a regular guest on financial talk shows throughout the United States. McBride currently serves on the board of Money Management International of Sugar Land, TX, the nation’s largest nonprofit credit counseling agency accredited by the National Foundation for Credit Counseling. 

Larry Solomon is a client advisor for Mercer Advisors in Washington, D.C. He has an undergraduate degree in Economics from SUNY Albany, an MBA from Lehigh University, and has been a certified financial planner since 2002. Larry is a published author and frequently contributes to articles on financial planning and investing in publications like The Wall Street Journal, Financial Times, US News, The Street.com, Bankrate.com, and others.