Are High-Yield Savings Accounts Worth it? It Depends...

When you have money you want to stash away for emergencies or to reach a financial goal, conventional wisdom usually recommends opening a high-yield savings account. Online banks usually offer much higher interest rates than traditional banks, as they have less overhead to fund, and many point out their interest rates in their marketing. 

But is keeping extra money in a high-yield savings account really worth doing? Here's a look at what these accounts are good for and when you should consider putting your money elsewhere.

How do high-yield savings accounts work?

The Federal Deposit Insurance Corporation (FDIC) reports that the U.S. has a 0.47% (as of Feb. 8, 2024) national average rate on savings account interest. High-yield savings accounts are named because they offer relatively high APYs compared to traditional savings accounts. 

An APY is used to calculate the rate of interest your savings balance will earn over the course of a year. High-yield savings accounts compound interest, usually daily, monthly, quarterly, or annually. This means that a portion of the APY is applied toward the account’s balance at a specific time.

When you have a savings account that compounds more often, the interest earned up to that point is added to your balance. The next time the interest is compounded, the amount you earn will be calculated based on your original balance plus the amount that was previously added to the account.

Example

Here's a quick comparison of how a high-interest savings account with a 3.00% APY and an account with the national average APY compare in terms of earnings on interest over time. 

For the purpose of this example, let's say these savings accounts compound interest quarterly, and the initial deposit is $5,000.

The more frequently an account compounds interest, the more you earn. Because the national rate for savings APY is at 0.47% (as of Feb. 8, 2024), a 3.00% rate is high and most likely to be offered by an online bank. 

Many online banks offer anywhere between 0.10% and 5.00% APY, which makes those on the higher end the best savings accounts for earning interest.

Are high-yield savings accounts worth it?

After looking at the current rates and how they could apply to the $1,000 I wanted to set aside for the year, I was not too excited at the prospect of opening a high-yield savings account. Adding around $30 to my account did not seem like very much. 

Yes, passive income is always a good thing, but I wanted to get the most out of where I chose to stash my cash. So I asked an expert when he thinks high-yield savings accounts are a good idea and when I'd be better off putting my money elsewhere.

1. You need a place for your emergency fund

Adam Beaty, a certified financial planner at Bullogic Wealth Management is a big fan of high-yield savings accounts, uses them personally, and recommends them to clients. He says they are a good choice for creating an emergency fund. “We recommend putting three to six months worth of non-discretionary expenses in a high-yield savings account,” Beaty says.

2. You have smaller short-term spending goals

Beaty advises that high-yield savings accounts are not where you want to put your money if you’re looking to save for retirement or build wealth. They’re more for saving toward a goal, such as a vacation or down payment, or having cash you can (relatively) easily access when something unexpected happens, like unemployment or home repair.

Daniel Patterson, a certified financial planner with Sweetgrass Financial Planning, agrees and suggests looking into other financial products when deciding what to do with money that isn’t for short-term use.

“Any money that is in excess of what you need to stay in your emergency fund or money being set aside for some short-term goal should be invested in low-cost mutual funds and [exchange-traded funds], as high-yield savings accounts are not where you should park your long-term investment money,” he says.

3. You’ll have expenses like taxes or premiums this year

If you’re planning for a large expense that will cost more than your monthly expendable income, a savings account is a great way to accomplish your aim. You can earn interest while you wait and access your money as soon as you’re ready to spend. 

Even if you’ll need to withdraw a chunk of money to pay taxes or pricey insurance premiums, it’s worth keeping that cash in a savings account so you can earn interest until that time approaches.

What to look for in a savings account

The best savings account for you will depend on how much you’re depositing and when you’ll need to access your savings. Here are some things to consider:

• High APY (Annual Percentage Yield). If you’ve decided to open a savings account, you’ll want to make sure you get the best possible rate of return each year. Some high-yield savings accounts require you to keep a minimum balance, while others have no such rule. Often, you’ll get a higher yield with an online savings account. APYs will vary based on Federal Reserve policies, market, and economic conditions.
• Ease of access. If you’re only going to access your money periodically and don’t care about the convenience of using an ATM or physical location, this might not matter much to you. But if you’d like the option to quickly access your cash, look for an account with plenty of options for easy access and transfers.
• Low or no fees. Make sure you understand all the fees associated with an account, including withdrawal limits, monthly maintenance fees, and minimum balance fees. There are plenty of fee-free accounts out there, so you shouldn’t need to pay anything to a bank to open your savings account.

Putting money into a savings account can be a great way to start growing your money without taking on much risk, and that cash will be available to you when you need it.

3 alternatives to high-yield savings accounts

If it sounds like a high-yield savings account might not fit what you have in mind for your money, some alternative investment accounts can offer higher rates of growth if you commit to keeping your money there for some time. See whether any of these options would work for your situation.

• Certificates of deposit
• Stocks
• Mutual fund

1. Certificates of deposit

A certificate of deposit, or CD, is a special type of account in which you commit to store your money for a set period of time. You’ll earn interest at an APY that is often higher than what banks offer for high-yield savings accounts. 

Interest can be fixed or compounded. If you’re shopping around for rates, see whether they’re fixed (no compounding) or have an APY and how often the interest is compounded. CDs are low-risk investments, as you’re essentially keeping your money in a bank account for a certain time frame. If you open a CD with a National Credit Union Association (NCUA) or FDIC-insured bank, up to $250,000 of your account is insured by the federal government.

2. Stocks

When you invest in stocks, you’re using your money to purchase a small portion of a company through a publicly traded market. Stocks are traded in shares, and each share is set at a price. Those prices continually go up and down as shares are traded. But if you invest your money in a stock that increases in value, you can make money because your shares are worth more than what you initially paid.

Companies that offer shares in the stock market may also pay dividends. This is a portion of the company’s earnings that is shared among all the stockholders. Usually, the amount of the dividend is set at a specific price per share. If you have 100 shares of a stock that pays 50 cents per share in dividends annually, you would get an additional $50, usually offered in cash or to purchase more shares.

Keeping your money in the stock market can be risky in the short term, as stock prices can fluctuate drastically from day to day and month to month. Stocks are worth looking into for long-term growth. Between dividends and the growth of a stock’s value over decades, your initial investment could be multiplied exponentially. If you’re interested in this option, check out our picks for the best investment apps.

3. Mutual fund

A mutual fund is another investment product. Instead of picking and choosing stocks to buy, your money is combined with that of other investors and then put toward a collection of stocks, bonds, and other securities. 

A portfolio manager usually oversees the account and makes decisions about what’s bought and sold based on market knowledge and experience. The goal is to enable investors to benefit financially from a portfolio of investments they may not have been able to build by themselves.

There is always a risk when you’re placing your money into the open market. However, there are many types of mutual funds, and they all have different minimum investment amounts, and levels of risk, and can be a more accessible way to start investing. Plus, having a finance professional overseeing your trades and investments could result in higher earnings than managing things on your own.

FAQs about high-yield savings accounts

Bottom line

I was looking for how to get the most out of committing $1,000 to a personal finance product that offered ways to make money with my money. After reviewing the options, I decided to invest my money in stocks and commit to a long-term strategy where I invest a set amount monthly and hold onto my shares for the next few decades. The $1,000 was a good start, and it looks like I’m on track to earn about 4% in dividends alone this year, which is more than all the other options I researched.

I also know that high-yield savings accounts are good for some purposes. If I was looking to build an emergency fund, I would choose the best savings account with the highest APY and keep making deposits until I have enough money for my needs. I would do the same if I was saving for something specific. But for right now, I’m banking on the stock market to achieve my savings goals.