Pros and cons of high-yield savings accounts

While interest rates may be at historic lows, there’s still some appeal in stashing some hard-earned cash in a high-yield savings account so you can reach your financial goals quicker.

That said, there are some potential risks in doing so, too. Job one for any savings-minded financial consumer is to understand what high-yield savings accounts are — and how they work.

What is a high-yield savings account?

“A high-yield bank account is any bank account which pays you substantive interest on your account balance,” said Connor Brown, founder of the After School Finance web site. “Currently, the national average interest rate on savings accounts is 0.06% according to the FDIC.”

You can find savings accounts that pay 0.80% or more. “While this isn’t much (and rates have fallen significantly recently), it is substantially better than the national average,” Brown said.

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Financial consumers who dig deep can even find stronger interest rates than that.

“These days, you can find high-yield accounts that range from 1-to-2%,” said Jon Matlock, a Dave Ramsey-trained financial coach with The Good Steward Financial Coaching.

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Compare high-yield savings accounts vs. checking accounts

A high yield checking account is very different than a high yield savings account.

“A savings account is meant to save money so it does not come with a debit card and has a limited number of monthly withdrawals allowed which cannot be made through an ATM,” said Freya Kuka, a personal finance specialist and founder of the Collecting Cents financial blog.

“It is not meant to replace your normal bank account but rather to be used alongside it.”

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Pros of a high-yield savings account

Like any financial tool, high-yield savings accounts have pros and cons.

• Better returns
• Real value
• Good for emergencies
• FDIC insured

Better returns: "The biggest benefit is you know you are getting an interest rate that is more competitive, and you will actually make some money on your cash savings (albeit not very much right now),” said Jared Andreoli, a financial planner with Simplicity Financial, LLC. “As an example, using a high yield account, currently offering 0.80% versus a traditional bank offering 0.01%, you could earn $800 versus $10 with an account balance of $100,000."

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Real value: The biggest benefit of a high-yield savings account is that you can help ensure your money doesn’t lose as much value in real terms over time. “For example, if inflation is 1.00%, and your bank account pays 0.06%, you lose 0.94% to inflation,” Brown said. “However, with a high-yield account that pays 0.80%, you lose just 0.20% to inflation.”

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Good for emergencies: High-yield accounts are great places to park an emergency fund. “They also make great places to stash cash as you prepare to make a big purchase,” Matlock said. “Plus, unlike certificates of deposit, high-yield savings and money market accounts are liquid. This means you can withdraw the money at a moment's notice in the event of an emergency.”

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FDIC insured: “Besides receiving a higher interest rate than a traditional savings account, high yields savings accounts also guarantee that you cannot lose your money and you are fully insured by FDIC up to $250,000 per account,” said Cameron Burskey, partner and managing director at Cornerstone Financial Service.

According to the FDIC, the national average savings account earns just 0.09% APY. A high-yield savings account typically pays a higher interest rate than a traditional savings account. If you want to maximize your savings, you should open a high-yield savings account today.

Cons of a high-yield savings account

• Check writing limits
• Not a good long-term investment
• Online only
• Max cap could be in play

Check writing limits: The biggest downside is that you often cannot write checks from a high-yield savings account (unlike a checking account). “You’re typically limited to just a handful of withdrawals per month,” Brown noted.

Not a good long-term investment: “1-to-2% rates don't even keep up with the rate of inflation every year,” Matlock said. “Therefore, looking to the market is a better option for longer-term investments.”

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Online only: Most high-yield savings accounts are online-only. “This means you typically can't go to a physical branch to do all your banking business,” Matlock said. “This can make withdrawals and deposits difficult depending on your location.”

Max cap could be in play: Another con with high yield checking accounts is that the higher interest rate normally has a cap after which you will not earn interest on the higher rate. “For example, the cap may be $25,000. After it reaches that amount, you’ll earn interest at the normal base rate,” Kuka said.

What to look for in a high-yield savings account

First and foremost, look for the highest interest rate you can find.

“Typically, banks that offer high-interest rates are relatively consumer-friendly, but you’ll also want to make sure the bank doesn’t charge other excessive fees,” Brown said. “Minimum balance requirements, overdraft fees, etc. can quickly eat away at any excess interest you’re earning, so it’s important to look at the whole picture.”

Also note that most banks that offer high yield checking accounts are smaller, more regional banks. “Consequently, only go for this option if you see yourself living in the same place for years to come,” said Kuka. “If you move around a lot or plan to move, opt for one of the online high yield savings account options that cover the entire United States.”

Additionally, make sure to check how long your interest rate is going to last (you’ll find it in your account contract’s fine print). “Be on guard,” said Kuka. “You may find out that it goes down to a much lower rate after the first six months.”

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