Is a High-Yield Savings Account Worth It?

High-yield savings accounts offered by online banks have become the go-to place to keep cash. Recent rate hikes have caused banks to offer 7x more interest on deposits since 2021 -- the highest-yield savings accounts offer about 70x more interest.

If you want to earn interest without worrying about a weird and wild market, then a high-yield savings account is worth looking into. Right now, returns are fantastic, better than they've been in years. Plus, a savings account is one of the safest places to put your money.

But high-yield savings accounts aren't the best solution for everyone. Below, we'll look at if they're a good option for you.

What is a high-yield savings account?

A high-yield savings account is a savings account that offers an above-average annual percentage yield (APY). There is no clear definition for what counts as a "high-yield" savings account, and the best rates can change over time (recently, the bar has risen due to Federal Reserve rate hikes).

High-yield savings accounts are usually offered through online banks. Because they don't have branches, these banks have lower overhead costs. They pass these on to customers in the form of better interest payments.

Benefits of a high-yield savings account

Here are some advantages of choosing a high-yield savings account:

High APY

As discussed above, high-yield savings accounts offer much better APYs than you'll find with traditional brick-and-mortar accounts. This helps your savings grow faster. For example, if you deposit $10,000 in a brick-and-mortar savings account with a 0.04% APY, you'd only earn $4 in a year. But if you put that money in a high-yield savings account with a 4.0% APY, you'd earn $400 in your first year.

Here's a look at how some of the best high-yield savings accounts stack up to traditional accounts:

Few fees

Online banks typically have few fees. You won't pay anything to open a high-yield savings account, and you won't be charged for not using the account. Chances are, you won't lose money by opening an account.

FDIC insurance

Money in high-yield savings accounts is protected by the FDIC up to $250,000 per depositor per bank. This means that even if your bank goes out of business, you won't lose any money as long as you stay below the FDIC insurance limit for your account.

Drawbacks of a high-yield savings account

High-yield savings accounts are great places to stash money short term, but they come with drawbacks:

Withdrawal limitations

It's harder to withdraw money from a savings account than a checking account. Most savings accounts don't include debit cards or check-writing capabilities, and some banks charge customers for making more than six monthly withdrawals.

Working with an online-only bank also makes accessing your funds harder. For one thing, there's no real-life branch to visit. To withdraw cash, you may have to transfer funds to a checking account. If your checking account is at a different bank, you'll have to wait a few days for the funds to transfer.

Fluctuating APY

The APYs on any savings account can change without warning. Dropping rates could mean less interest earned on your savings. There's not much you can do about this other than switch banks or wait for rates to go back up.

Not ideal for long-term savings

While a high-yield savings account's rates are much better than brick-and-mortar rates, they're still probably not going to beat inflation. So while you're making money, you could be losing buying power. That's why investing is usually the better choice for money you plan to invest for the long term.

When should you use a high-yield savings account?

A high-yield savings account is a great place to keep the following:

Emergency fund

Emergencies break down the door without warning, so you want to keep your emergency savings handy. If you invest your emergency fund savings into the stock market, you could be forced to sell at a loss. But you won't have this problem with a high-yield savings account.

Short-term savings

Saving up to make a large purchase within the next five years? A high-yield savings account is a better home for your money than a brokerage account. The stock market can be unstable in the short term. By sticking to a savings account, you ensure market swings won't eat money you need tomorrow.

Alternatives to a high-yield savings account

If a high-yield savings account seems like a poor fit for your needs, one of these accounts might suit you better:

Checking account

A checking account gives you several ways to access your cash, including debit cards and checks. It's the best choice for everyday spending, but it's not a great home for savings. Most don't offer interest, and those that do offer low returns.

Money market accounts

A money market account (MMA) combines some of the best features of checking and savings accounts. They typically offer higher rates than saving accounts and more ways to access deposits. But they may require you to fund the account with thousands or tens of thousands of dollars.

Certificate of deposit (CD)

A certificate of deposit (CD) typically offers higher returns than a savings account, but you must be willing to lock up your savings for a period of time. If you withdraw your funds early, you'll be charged penalties. CDs are good alternatives to savings accounts if you plan on leaving the money for the entire CD term, anywhere from a few days to several years.