Risks and Benefits of High-Yield Savings Accounts

By Jackie Lam · July 08, 2024 · 9 minute read

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Risks and Benefits of High-Yield Savings Accounts

Savings accounts are typically safe places to park your funds, but most don’t earn much interest. The current national average interest rate is at a relatively low 0.45%. That means these may not be the best option to grow your funds — the rate of inflation may eat into your earnings over time.

But some savings accounts can help you keep pace with inflation or even outstrip it. A high-yield savings account (HYSA) works in much the same way as a standard savings account but pays a far higher, more competitive interest rate.

But, as with almost any financial product, there are advantages and disadvantages to stowing your cash in a high-yield savings account. Learn more about the details here.

What Is a High-Yield Savings Account?

A high-yield savings account is a type of savings account that can be found at a financial institution like a bank or a credit union. The main draw of a high-yield savings account is that it offers far higher rates than a standard savings account — possibly eight to 10 or more times higher.

For instance, some online-only banks are currently offering upwards of 4.00% APY (annual percentage yield, which takes compounding interest into account). Compare that to the rate of 0.45% for standard accounts.

High-yield savings accounts are often found at online banks. These financial institutions typically have lower operating costs since they don’t have brick-and-mortar locations. Those savings can be passed on to their customers in the form of higher interest.

They are also more likely to bypass monthly account fees, and their mobile apps usually have more robust features than typical banks.

Earn up to 4.60% APY with a high-yield savings account from SoFi.

Open a SoFi Checking and Savings account and earn up to 4.60% APY - with no minimum balance and no account fees.


Pros and Cons of High-Yield Savings Accounts

As with any savings option, a high-yield savings account has pros and cons. Seeing both sides can help you make a well-informed choice.

Pros

First, consider the upsides of a high-yield savings account:

•   Higher earnings. As with standard savings accounts, interest rates usually fluctuate on a high-yield savings account, depending on the Federal Reserve’s rates and market dynamics. However, high-yield savings accounts usually feature competitive rates that are much higher than those of a standard savings account. You can feel good that your money is working hard and growing for you.

•   Funds are liquid. With most high-yield savings accounts, you can withdraw funds whenever you like. This is in comparison to, say, a certificate of deposit (CD), in which you commit to keeping your money at the bank for a certain period of time, usually at a fixed interest rate. If you pull your funds out early, you can be assessed a penalty. Because of its accessibility, a high-yield savings account can be a good place to keep your emergency fund and other short- to medium-term savings, since you can withdraw the cash easily.

•   Low risk. If you are trying to grow your money but don’t want much risk, a high-yield savings account can be a smart vehicle. While investments may potentially earn strong returns, these are not insured against loss the way a savings account is.

If you have a high-yield savings account with a bank, the FDIC (Federal Deposit Insurance Corporation) typically protects it for up to $250,000 per depositor, per account ownership category (such as single, joint, or a trust), and per insured institution.

If your money is deposited in a credit union, it will likely be protected by the National Credit Union Administration (NCUA) in the same way.

•   Few or no fees. High-yield savings accounts are often offered by online-only banks that don’t have the overhead costs of brick-and-mortar institutions. As a result, they may be in a position to skip the fees other banks assess.

Cons

Next, consider the potential downsides of a high-yield savings account:

•   Interest rates might change. High-yield savings accounts feature variable interest rates. While a bank might advertise high APYs, it can’t guarantee that return. The Fed and market dynamics can impact the rates financial institutions offer, so it’s important to understand that you are not locking in a rate for the life of your account.

•   Might have withdrawal limits. While the Federal Reserve in 2020 dropped the previous rule of six saving account withdrawals and transfers per month, some financial institutions might still enforce this cap. You’ll want to read the fine print or ask customer service if you’ll be charged a fee for more than six withdrawals per month. In some cases, banks reserve the right to convert your savings account to a checking account if you make more than six transactions. Worth noting: This can be true of all savings accounts, not just high-yield ones.

•   Not a good fit for long-term savings. High-yield savings accounts typically earn more than standard savings accounts and often CDs. However, they may not be a good place for long-term savings, such as your retirement account. Those savings might be better invested in the market where, yes, there’s higher risk but historically higher reward.

•   May have minimum balance requirements and fees. Some banks may require you to keep a minimum amount of money in your account at any given time. If your balance dips too low, you could be assessed a fee or your funds might earn a lower interest rate. Again, learn the details from your bank so you can be prepared.

Next, take a look at how the pros and cons of a high-yield savings account stack up in chart form.

Pros

Cons

Higher earnings Interest rates might change
Liquid Might have withdrawal limits
Low risk Not a good fit for long-term savings
Few or no fees May have minimum balance requirements

Recommended Reading: How Do Banks Make Money?

High-Yield Savings Account vs Savings Account

You can think of high-yield savings accounts and standard accounts as cousins. They share a lot of the same features. For one, they are deposit accounts that are best for short- or medium-term savings where your money may grow thanks to compounding interest. They are both liquid, meaning you can transfer money in and out at any time. Both high-yield savings accounts and savings accounts might have fees and minimum balance requirements.

Where the two differ is in their money-growing potential.

•   As the name implies, high-yield savings accounts tend to offer far more competitive interest rates than a standard savings account. Currently, the average national interest rate for a standard savings account is 0.45%.1 High-yield savings accounts can offer interest rates that are several times higher.

•   High-yield savings accounts are often offered by online-only banks. While these don’t have brick-and-mortar branches, you can take care of your banking online or via a banking mobile app. Since they don’t have physical locations to staff and manage, they likely have fewer and lower fees…perhaps none at all.

Here’s a look at how these two kinds of accounts compare:

High-Yield Savings Account

Standard Savings Account

Higher interest rates (can be several times higher) Lower interest rates
Often found at online-only financial institutions Typically found at brick-and-mortar institutions
More likely to have lower or no monthly account fees More likely to have monthly account fees

As mentioned above, your money can grow faster in a high-yield savings account versus a standard savings account. Here’s an example to show you exactly how that works. Using the national average of 0.45% APY for a standard savings account and 4.50% APY for a high-yield savings account, this chart reveals how interest earnings compare based on a principal of $5,000 with interest compounding monthly.

Time Period

Interest in a High-Yield Savings Account (4.50%)

Total in Your Account

Interest Earned in a Savings Account (0.45%)

Total in Your Account

6 months $113.56 $5,113.56 $11.26 $5,011.26
1 year $229.70 $5,229.70 $22.55 $5,022.55
2 years $469.95 $5,469.95 $45.19 $5,045.19
3 years $721.24 $5,721.24 $67.94 $5,067.94
5 years $1,258.98 $6,258.98 $113.75 $5,113.75

So, as you see here, the high-yield savings account has earned you more in interest.

$6,258.98 – $5,113.75 = $1145.23, which is how much more you’d have in two years if your money were sitting in a high-yield vs. standard savings account, without even making any additional deposits. That could inspire you to switch savings accounts from a standard one to a high-yield option.

Calculating Returns on a High-Yield Savings Account

If math is your jam, you can calculate the savings interest by using a formula that calculates simple interest:

A (amount of interest) = P (principal) x R (interest rate in decimal, not percentage, format) x T (time).

So here’s an example of $5,000 principal earning 4.50% over 2 years: $45

$5,000 x 0.0045 x 2 years = $45

At the end of two years, you’ll add that $45 of interest earned to your $5,000 principal for a total of $5,045.

However, as noted, this reflects simple interest, not the money-multiplying impact of compounding interest. To figure out compound interest, you would use this more complex formula:

A = P(1 + r/n)^nt

•   A = how money you’ll end up with (principal plus interest)

•   P is the principal

•   r is the annual interest rate (expressed in decimal, not percentage, format)

•   n is the number of times the interest compounds in a year. If the bank compounds monthly, n= 12.

•   t is the number of years you are keeping the money in the account

Here’s an example of $5,000 at 4.50% interest rate compounded monthly for two years:

$5,000(1+0.045/12)^12×2 = $5,469.95

Not a fan of complex calculations? There are an array of online interest calculators you can use.

Recommended: How to Transfer Money

Is a High-Yield Savings Account Right for You?

Now that you know the high-yield savings account pros and cons, you can decide if one is right for you. Among your savings options, a high-yield savings account could be a strong contender if you’re looking for a place to park your funds and earn a competitive interest rate. If you are looking for a place for long-term savings, though, you might fare better looking elsewhere, such as a brokerage account. This could give you even greater growth.

One consideration when choosing where to deposit your funds: whether a bank or credit union requires you to pay monthly account fees or has minimum balance requirements varies. Ideally, you’ll want to steer clear of fees or pay as little as possible. Do your homework beforehand, and explore your options. Online-only banks often offer high-yield savings accounts with minimal or zero fees.

Savings Accounts From SoFi

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

What are the disadvantages of a high-yield savings account?

There are high-yield savings account pros and cons. One disadvantage can be variable interest rates, which means the interest rate might decrease over time, which is true of standard savings accounts, as well. While the Federal Reserve has paused the six withdrawals per month limit, some financial institutions may still enforce this cap. A high-yield savings account might also have account fees.

Is it worth it to get a high-yield savings account?

A high-yield savings account could be worth it if you have near-term savings goals and want a safe, secure place to park your funds and earn interest. With these accounts you can earn eight to 10 times the rate (or possibly higher) vs. what standard savings accounts pay. It’s a good idea to check for any fees before opening an account as well.

Can you ever lose your money with a high-yield savings account?

Losing your money in a high-yield savings account is extremely uncommon. However, should you have more in your accounts than the protected limits offered by the FDIC or NCUA ($250,000) you might find greater peace of mind banking with a financial institution that offers extended insurance coverage1.


Photo credit: iStock/pixdeluxe

1SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by banks in the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms. See list of participating banks at SoFi.com/banking/fdic/receivingbanks.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


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