Pros and Cons of High-Yield Savings Accounts

High-yield savings accounts are like bank vaults that slowly fill with cash. Though they have their drawbacks -- what financial account doesn't? -- they make great places to put money for safekeeping.

A high-yield savings account (HYSA) has an annual percentage yield (APY) that is well above the national average APY. If you're building an emergency fund, consider storing it in an HYSA. That way, you can withdraw money at any time without penalty. Plus, you get a great interest rate.

Check out the pros and cons of high-yield savings accounts so you can easily compare them to alternatives like regular savings accounts and money market accounts. Read on to save for your financial goals the right way.

Pros of high-yield savings accounts

Here are some of the benefits of choosing a high-yield savings account.

1. High annual percentage yield (APY)

With a high-yield savings account, you'll earn more interest on your savings over time.

For example: If you had $5,000 to save, here's how much interest you could earn in a high-yield vs. a traditional savings account:

• High-yield with 4.0% APY: $2,456.96 after 10 years
• Traditional with 0.4% APY: $204.05 after 10 years

(The exact interest earned would depend on many factors -- like how often your bank compounds interest and whether or not your interest rate changes over the years.)

2. Interest compounds daily

Most high-yield savings accounts pay interest daily. That's more profitable than what most banks do; only deposit interest into your account once per month. Over the long run, daily compounding leads to more cash for you.

3. Few fees

High-yield savings accounts are almost exclusively available through online banks. These banks don't have branches with in-person customer service, so they cost less to operate than brick-and-mortar banks do. As a result, digital banks are able to offer you more competitive interest rates and charge fewer fees. Many HYSAs charge zero monthly fees.

4. Easy to withdraw funds

Savings accounts keep your funds within easy reach, so you can access your savings when you need them most. That's why they're a great home for emergency funds and short-term savings. Unlike certificates of deposit (CDs), savings accounts let you withdraw money sooner than planned at zero cost.

5. Online account tools

Since most high-yield savings accounts are offered by online banks, they usually have strong tools. These include online portals and mobile apps that let you quickly view your account balance, transfer funds, pay bills, and more. Many brick-and-mortar banks lag in this area.

6. FDIC insurance

All the top high-yield savings accounts are FDIC insured up to $250,000 per depositor per bank. This means that the FDIC will reimburse you up to this amount if your bank goes out of business and is unable to pay you back. The NCUA will reimburse you if you open a high-quality account through a credit union and it fails.

Cons of high-yield savings accounts

Here are some of the drawbacks to opening a high-yield savings account.

1. Withdrawal limits

All savings accounts used to charge customers fees if they made more than six monthly withdrawals. (This was mandated by a federal law known as Regulation D.) The government waived this at the start of the COVID-19 pandemic and has yet to reinstate it. But some banks still haven't changed their ways.

As a result, you could face penalties if you frequently move money out of your savings account. Search your bank's website or contact a representative to check the bank's policy on withdrawal limits.

2. Withdrawals might require a few extra hoops

Though it's typically easy to withdraw money from a savings account, banks sometimes require extra steps. Most savings accounts don't include checks, and only a few have ATM cards. To withdraw cash, you may have to transfer money to a checking account first. This can take a few days if your checking account is at another bank, making it hard to withdraw money quickly.

3. Minimum balance requirements

Some high-yield savings accounts have minimum balance requirements, meaning you must maintain a certain balance to get the best interest rate. For example, if an account requires you to deposit $5,000 to earn a premium rate, but your deposits total $3,000, you’ll earn a lower-than-advertised rate.

One more thing: Some institutions may require you to meet minimum deposit requirements, such as depositing $1,000 to open an account. Many of the top HYSAs don't require this.

4. Rates fluctuate

Savings account rates can change over time. Sometimes this is good news, and sometimes it's not. But either way, there isn't much you can do about it. That's why it's tough to predict how much you'll actually earn in interest in a given year. If the Federal Reserve reverses course on interest rates, then HYSA rates will probably follow. 

5. Not a good fit for long-term savings

High-yield savings accounts earn you more money than brick-and-mortar bank accounts do. But often, you still won't earn enough to keep up with inflation. Even though your account balance rises, your buying power decreases.

You can avoid losing buying power by investing your long-term savings in alternatives like the stock market. That way, you have the potential to build serious long-term wealth. In the same vein, money market accounts are best suited to short and mid-term savings.

Is a high-yield savings account right for you?

Whether a high-yield savings account is right for you depends on one thing: what you need the money for. Savings accounts are great for:

• Building your emergency fund.
• Saving for large purchases you plan to make within the next five years.

Keeping your money in a top-tier savings account will earn you interest while shielding you from stock market volatility. In other words, you won’t suddenly lose everything to a poor-performing investment. It's one of the safest ways to save dollars.

Are you comfortable with online banking? If you don't own a smartphone and aren't too comfortable using the internet, stick with traditional low-yield bank accounts.

If you're ready to open a high-yield savings account, the next step is to choose the right savings account for you.