Can you lose money in a high-yield savings account?

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You’ve probably been told that a savings account at the bank is a safe place to stash your money. But is it better to use a high-yield savings account to get even higher returns on your money? Is it safe? 

The principal in your high-yield savings account won't fluctuate with the stock market. But, you can lose money if the bank charges high fees or if you fail to maintain the minimum balance. Here’s what you need to know. 

What is a high-yield savings account?

High-yield savings accounts allow your money to grow faster while providing a safe and accessible place to store your savings. These accounts are typically FDIC-insured, meaning your money is protected up to $250,000 per person per account in case of a bank failure. 

The main advantage of a high-yield savings account is the potential for higher returns on your money. The best high-yield savings accounts offer APYs of over 5.00%, significantly higher than the national average of 0.36%. 

If you deposit $10,000 into a high-yield savings account with a 5.00% APY, you'll earn $500 in interest over a year, compared to just $36 with a savings account earning the average rate. 

Guaranteed rates vs. variable rates 

High-yield savings account rates are typically variable, not fixed, like those of certificates of deposit (CDs). That means the interest rate on your account can change at any time, usually at the discretion of the bank or credit union. Changes in the broader economy and Federal Reserve policies can often influence these rates.

“Whatever happens with the Fed and the fluctuations that occur as interest rates drop means high-yield savings account interest rates are going to immediately drop,” says Chad Willardson, president and founder of Pacific Capital. 

This means that the APY that attracted you to a particular account may not last forever, and your earnings potential could diminish over time.

Can you lose money in a high-yield savings account?

While it's unlikely that you'll lose money in a high-yield savings account due to market fluctuations or bank failures (thanks to FDIC insurance), there are some scenarios in which you could see your balance decrease.

Fees 

Some high-yield accounts come with fees that can eat into your earnings or even cause you to lose money. These may include maintenance fees, minimum balance fees, or transaction fees for excessive withdrawals or transfers. 

Be sure to review the fee schedule for any high-yield savings account you're considering. Choose a bank that aligns with your needs and banking habits.

Failure to meet minimum balance requirements

Many high-yield accounts require you to maintain a minimum balance. If your balance falls below this threshold, you may earn a lower interest rate or be charged a fee, which could negate your earnings or cause you to lose money.

Inflation

While not directly related to your high-yield savings account, inflation can impact the real value of your money over time. If the inflation rate exceeds the APY on your high-yield savings account, the purchasing power of your savings will diminish even if your account balance continues to grow.

Opportunity cost

Another way you might perceive a loss is through opportunity cost. This refers to the potential gains you miss out on by choosing one investment over another.

For example, if you keep your money in a high-yield savings account earning 4% APY while the stock market has average returns of 10% per year, you've missed out on those higher potential returns. While you haven't lost money in absolute terms, you've lost the opportunity to earn more.

Bank failures and insurance limits

While bank failures are rare, they can happen. Federal insurance protects your deposits in such cases, but only up to certain limits.

If your deposits exceed these limits at any one institution, an amount over $250,000 could be at risk in the unlikely event of a bank failure.

How to make the most of your high-yield savings account

“If you have short-term liquidity needs, you certainly should be earning some interest on that,” says Willardson. “Today, the rates are high. So, if you're trying to earn interest, you should get fixed terms as much as possible. In other words, lock in these interest rates.”

Consider the following tips to maximize the benefits of a high-yield account and lower the risk of losing money.

1. Shop around for the best rates and terms

Interest rates can vary between banks, and even small differences in APYs can add up over time, especially for larger balances.

Start by comparing rates from multiple banks and credit unions. Don't limit yourself to well-known traditional banks. Online banks often offer higher rates due to their lower overhead costs. 

However, be sure to look beyond just the headline rate. Some banks offer promotional rates that may be time-limited or come with specific conditions. That's why it's crucial to understand the long-term rate you can expect.

Remember to factor in any fees when comparing overall returns. A slightly higher rate might not be worthwhile if monthly fees or other charges offset it. The goal is to find the best combination of high interest and low fees to maximize your net returns.

2. Read the fine print carefully 

Maximizing your returns isn't just about finding the highest advertised rate. Review the fine print before opening an account, as the details can impact your returns.

Pay close attention to monthly fees and learn how they can be avoided. Some banks waive these fees if you maintain a certain balance or set up direct deposits. Understanding these requirements can help you avoid charges that eat into your earnings.

Be aware of the bank's policies on rate changes. Some banks guarantee their rate for a certain period, while others may change rates frequently. Knowing this can help you decide whether to commit to a particular account for the long term or be prepared to switch if rates decline.

3. Maintain the minimum balance 

Many high-yield savings accounts offer tiered interest rates. The higher your balance, the more interest you could stand to earn.

Start by clearly identifying the requirements for your account. Set up automatic transfers from your checking account or direct deposit from your paycheck to ensure you meet or exceed this minimum. This helps you earn the highest possible interest rate and encourages regular saving.

Consider consolidating multiple accounts if doing so will help you meet balance requirements. However, if you're consolidating large sums, be mindful of FDIC insurance limits.

Review your account regularly to ensure you're not falling below the balance requirement. Some banks may automatically lower your rate or impose fees if your balance drops below the threshold, even temporarily.

Alternatives to a high-yield savings account

If you're saving for a specific goal or have a longer time horizon, you may want to consider other options. This includes: 

1. Certificates of deposit (CDs): These accounts offer a fixed rate for a set term, typically ranging from a few months to several years. CDs usually provide higher interest rates than high-yield savings accounts but require you to lock up your money for the term.
2. Money market accounts: These accounts combine features of checking and savings accounts. They offer competitive interest rates, check-writing capabilities, and debit card access. However, they may require higher minimum balances than high-yield savings accounts.
3. Treasury bills: These short-term government securities offer a safe and stable return, backed by the full faith and credit of the U.S. government. T-bills typically have one year or less maturities and can be purchased directly from the Treasury Department or a broker.

The bottom line

High-yield savings accounts can be a safe way to grow your savings faster.

There is a risk of losing money due to fees or failing to meet minimum balance requirements. But, these risks can be mitigated by choosing a high-yield savings account that aligns with your financial goals and habits.

The key to maximizing your high-yield savings account is to do your homework, read the fine print, and monitor your account to ensure you're maximizing your earnings and minimizing any potential losses.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.