There are many ways to accumulate savings. Some come with risks, including things like stock market investments. ETFs and mutual funds, while less volatile than other investment options, do not guarantee that your money will grow. One risk-free option that’s useful if you want to keep your savings liquid is a high-yield savings account or HYSA.
Here at Addition Financial, we believe in making financial decisions as easy as possible. High-yield savings accounts offer many benefits that can help you accrue savings while eliminating the risk that comes with other investments. With that in mind, here are five benefits of a high-yield savings account.
What is a high-yield savings account?
A high-yield savings account has a lot in common with a traditional savings account with a few notable differences. The term “high-yield” points to the most important difference between these accounts. The average annual percentage yield (APY) for a traditional savings account is just .35%, which means that if you had a $2,000 balance, you would earn just $7 over the course of a year.
By contrast, the APY for a high-yield account may be 3% or more. If we use that rate and the same $2,000 balance, you’d earn $60 in the same one-year period. That’s eight and a half times as much!
How does a high-yield savings account work?
High-yield savings accounts are similar to a regular savings account in that they provide a place to keep your money and earn a return on your deposit. If you choose a credit union for your high-yield account, you’ll earn dividends as a member and part-owner of your financial institution. If you choose a bank, you’ll earn interest.
High-yield accounts earn a higher interest rate or higher dividends than a standard savings account. Our example above shows that in some cases, you may earn a much higher rate than you would with a regular savings account, making a high-yield savings account a good option if you want to boost your savings.
It’s common for high-yield savings accounts to come with some restrictions related to how you can access your money and when you can earn the highest rate of return. Here are a few examples:
- Minimum deposit. Some credit unions and banks have a minimum deposit requirement to open a high-yield savings account.
- Minimum balance. Another common requirement is that account holders must maintain a minimum balance to earn dividends or interest. Alternatively, the rates may be tiered, with the highest rates available to those with the highest balances.
- Withdrawal limits. There may be some limits in terms of how often you may withdraw money from your HYSA. For example, some financial institutions limit transactions to six per month.
- Monthly fees. You may have to pay a monthly account fee to have a high-yield savings account. Your financial institution should disclose all fees up front, but be sure to read the fine print and identify any hidden fees.
You’ll also need to keep in mind that with a HYSA, you can’t write checks and you won’t have a debit card to access your money or transfer funds at an ATM. You may be able to get both of these things if you opt for a money market account, which typically offers higher interest rates or dividends than a traditional savings account but has more flexibility than a HYSA.
What are the benefits of a high-yield savings account?
There are many ways in which saving money in a high-yield savings account can be beneficial. Here are five advantages to consider.
#1: High APY
The first and arguably biggest benefit of choosing a high-yield savings account is that you’ll earn a significantly higher interest rate or dividend yield than you would with a standard savings account. It’s not unusual for a HYSA to offer a return rate of 3% or more, which means you could earn eight to 10 times as much as you would with a regular savings account.
Of course, not all HYSAs are created equal and there are other options that can help you increase your savings, including a money market account.
#2: Compounding interest
On a related note, the interest in a high-yield savings account is compounding interest, which means that you’ll earn interest on the interest you earn. In most cases, the interest or dividends on a HYSA are compounded daily and credited to your account monthly. That means your balance will increase consistently, and you’ll be earning more money.
Keep in mind that compounding interest is also a feature of traditional savings accounts and money market accounts. The main difference is that with a higher interest rate, you’ll increase your savings faster with a HYSA or money market account than you will with a regular savings account.
#3: Liquidity
When you put your money into a Certificate of Deposit (CD) or an investment account, it isn’t liquid. That means it won’t be accessible to you if you need money quickly. That’s not the case with a high-yield savings account.
As we noted above, the money in a HYSA is as accessible as the money in any traditional bank account. You can withdraw funds as needed. While there may be limitations on the number of withdrawals you can make in a month, you won’t need to wait to get your money if and when you need it.
#4: Few or no fees
It’s often the case that high-yield savings accounts either have no monthly fee or a low fee. In some cases, the financial institution may waive fees for accounts with balances over a certain threshold.
You should always look at the fine print and ask about fees before you choose an account. While reputable financial institutions will disclose all fees with full transparency, some banks may not be as diligent about doing so as others.
#5: Your account is insured
Most financial institutions in the United States are insured by either the National Credit Union Association (NCUA) or the Federal Deposit Insurance Corporation (FDIC). In both cases, the balances in your high-yield savings account are insured up to $250,000.
The one piece of advice we’d give here is to make sure you check that your financial institution is insured, particularly if you’re looking at one or more online banks. You can check for FDIC insurance here and NCUA insurance here. Deposits at Addition Financial are insured by the NCUA.
Potential downsides of high-yield savings accounts
Here are a few potential disadvantages to consider before you open a high-yield savings account:
- A high-yield savings account may sometimes be referred to as an investment, but it’s not an investment in the traditional sense of the word. A 3% interest rate may seem generous compared to a .35% rate on a regular savings account, but it’s not the type of investment that will allow you to save for retirement or your child’s college education.
- You won’t be able to write checks or use an ATM card to access your money. If those things are important to you, the best alternative is an insured money market account, which also offers a higher-than-average interest rate but with a debit card and checks.
- There may be limitations on how often you can withdraw money from your account, so make sure to check if you think you’ll need to access your funds often.
- There may be a minimum balance requirement to earn interest or dividends–and in some cases, the rates may be tiered to benefit those with the highest balances.
- It’s possible that inflation may out-strip your earnings. In a period of high inflation like we experienced in 2022-2023, inflation was significantly higher than the return on a high-yield savings account.
How to use a high-yield savings account
Here are some of the best ways to use a high-yield savings account or a money market account:
- Create an emergency fund. Both HYSAs and money market accounts are good options for your emergency fund. The money in your account remains liquid and accessible, but you’ll still earn a return on your balance.
- Save for a major purchase. If you’re saving saving for a financial goal, like a down payment on a house or you know you’ll be needing a new car soon, then opening a HYSA can be a good way to boost your savings with a higher-than-average interest rate. The money will be accessible when you need it.
- Keep retirement funds accessible. If you make annual withdrawals from your 401(k) or IRA, then putting them into a high-yield account may be your best option. The funds will be accessible to you, but still earning some money as they sit in your account.
It’s important to note here that while a high-yield savings account may be referred to as an investment, it’s not in the same category as a stock market portfolio or even a CD. While your money will earn compounding interest or dividends, it’s not enough to help you save for retirement. However, because HYSAs are insured, they do qualify as risk-free investments.
Earn more interest with Addition Financial
Opening a high-yield savings account or a money market account is a risk-free way to increase your savings and makes it easy to create an emergency fund or save for big purchases like a house or a car. The five benefits we’ve listed here illustrate why you don’t need to settle for the comparatively low interest rate of a standard savings account.
Are you looking for a risk-free way to grow your money? Addition Financial is here to help! Click here to learn about our insured money market account and start earning dividends right away.
