A high yield savings account is considered one of the safest places to put your money. If you’re looking for a low-risk way to earn interest on your savings, a high yield account is a great option. But are these accounts really as safe as they seem?
What is a High Yield Savings Account?
A high yield savings account is a type of deposit account offered by banks and credit unions. It works similarly to a traditional savings account – you can deposit money, withdraw money, and earn interest.
The key difference is that a high yield savings account offers a higher interest rate, also known as APY (Annual Percentage Yield). Traditional savings accounts tend to have APYs around 0.01%, while high yield accounts offer 0.50% or more.
High yield savings accounts are offered by online banks, credit unions, and some brick-and-mortar banks. The online banks tend to offer the very highest rates since they have lower overhead costs.
Are High Yield Savings Accounts Safe?
When weighing the safety of any bank product, there are two key factors to consider:
FDIC Insurance
Savings accounts at FDIC-insured banks are protected against losses up to $250,000 per depositor. This applies to both traditional and high yield savings accounts.
So if the bank fails for some reason, you won’t lose any of the money in your insured deposit accounts up to the coverage limit.
No Market Risk
Savings accounts are extremely low risk compared to investments like stocks and bonds. Your account balance will not fluctuate based on market conditions.
The only risk is that interest rates could go down, reducing your interest earnings. But your principal deposit remains completely safe.
Useful Information: Which Savings Account Will Earn You the Most Money?
Benefits of High Yield Savings Accounts
What makes these accounts so appealing? Here are some of the main benefits of using a high yield savings account.
Higher Interest Rates
The top high yield savings accounts offer APYs around 2% to 4%. This allows your money to grow faster compared to a traditional savings account.
For example, a $10,000 balance earning 0.01% would only make $1 in interest per year. But in an account earning 2% APY, you’d make $200 per year on the same balance.
FDIC Insured
As mentioned above, your deposit up to $250,000 is insured and safe, even if the worst happens and the bank fails. FDIC insurance is automatic when you open an eligible account.
Liquidity
You can withdraw your money from a high yield savings account anytime without penalty. This makes it a great place to keep an emergency fund or other short-term savings goals.
CDs may offer higher rates but penalize you for early withdrawals. With a savings account, you have easy access.
Online Banks Offer Great Rates
Online banks tend to offer the highest yields because they have less overhead than brick-and-mortar banks. Shopping around online is a great way to find a top rate.
Compound Interest
Your interest compounds daily in a high yield savings account, helping your balance grow faster. Compounding means you earn interest on your interest.
Risks and Drawbacks
High yield savings accounts are considered very safe, but there are some potential downsides to consider.
Lower Returns Than Investing
While savings accounts earn interest, the returns are lower than investing in the stock market long-term. The S&P 500 has historically returned around 10% annually.
But investment returns are not guaranteed. Savings accounts carry essentially no risk to your deposit.
Interest Rates Can Change
Savings account rates are variable, meaning they can go up or down at any time depending on market conditions. Your principal is safe, but your interest earnings may fluctuate.
Inflation Can Reduce Value
Inflation around 2% annually can reduce your purchasing power over time. Look for accounts offering rates higher than inflation.
Limits on Withdrawals
Some accounts limit monthly withdrawals and transfers. Make sure your account offers enough flexibility for your needs.
Alternative Options
Other accounts like CDs and money market accounts can offer higher rates, but they come with more restrictions.
Who Should Consider a High Yield Savings Account?
Here are some examples of who can benefit most from using a high yield savings account:
Emergency Funds
One of the top recommended uses is an emergency fund. You need quick access to this money, and high yield savings offer both liquidity and interest earnings.
Short-Term Goals
Whether you’re saving for a vacation, car, home down payment, or other goal under 5 years, a high yield account keeps your money safe and growing.
Parking Cash
If you have extra cash you don’t need immediately, you can park it in a high yield account to earn well above a traditional savings rate.
Who May Want Other Options?
High yield savings work well for short-term savers who prioritize safety. But other options may be better suited for some cases.
Long-Term Growth
Long-term retirement savers need more growth potential from investing in the stock market. High yield savings alone won’t provide enough returns.
Business Accounts
Business savings accounts allow more transactions and features. High yield business savings are available from some banks.
Higher Rates on CDs
If you don’t need liquidity, 1-year or longer CDs can offer even higher guaranteed returns than savings accounts.
Having a High Yield Savings Account
When comparing high yield savings accounts, look for:
- Highest APY rates
- Low or no minimum balance requirements
- Limited fees
- Flexible access to your funds
- FDIC insured up to $250,000
Online banks tend to offer the best combination of high yields and low fees. Opening an account is easy online or from your mobile device.
Are High Yield Accounts Safe to Invest?
To summarize, high yield savings accounts are considered extremely safe places to put your money due to:
- FDIC insurance protecting your deposit up to $250,000 per bank
- No market risk – your account balance does not fluctuate
- Liquidity to withdraw funds anytime
While they offer only modest returns, high yield savings accounts provide a major advantage over traditional savings accounts. They give savers a safe way to grow their money faster.
Frequently Asked Questions
What is the difference between a high yield savings account and a regular savings account?
The main difference is that high yield savings accounts pay a much higher interest rate than traditional accounts – generally over 10 times higher. This allows your balance to grow faster.
How much interest can I earn with a high yield account?
Top yields today are around 2% – 4% APY. For example, you’d earn $200 per year on a $10,000 balance at 2% APY.
Are high yield savings accounts FDIC insured?
Yes, accounts at FDIC member banks are insured up to $250,000 per depositor. This protects your money even if the bank fails.
Can I lose money in a high yield savings account?
It’s highly unlikely you would lose your principal deposit in an FDIC insured high yield savings account. Variable rates could reduce your interest earnings, but not the money you deposited.
What are the risks compared to investing?
Savings accounts carry almost no risk to your deposit, while investments like stocks can lose value. But investment returns tend to be higher over the long run.
Who should use a high yield savings account?
They work well for short-term goals under 5 years since they offer safety, liquidity, and higher returns than a traditional savings account.
