High-yield savings accounts are still out there. Are they worth it?

Hanna Horvath Headshot

By

Hanna Horvath, CFP®

Hanna Horvath, CFP®

CERTIFIED FINANCIAL PLANNER™ & Managing Editor, Growth

Hanna Horvath is a CERTIFIED FINANCIAL PLANNER™ and managing editor for growth at Policygenius. She helps produce the Easy Money newsletter, and owns all growth initiatives for Easy Money. She recently passed her exam to become a CERTIFIED FINANCIAL PLANNER™ in November 2020.

Hanna's work has appeared in NBC News, Business Insider and Inc. Magazine. She is regularly quoted in top media outlets, including CNBC, Best Company and HerMoney. She has also appeared on the Money Moolala podcast and All's Fair podcast.

Prior to Policygenius, Hanna wrote for KNBC in Los Angeles and WNBC in New York. When she isn't writing, she's (often) running, (usually) cooking and (sometimes) doing photography.

Published January 16, 2019|4 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our

editorial standards

and how we make money.

News article image

Updated May 8, 2020: With the future of the economy looking uncertain in the wake of the COVID-19 pandemic, many Americans are looking for safe places to save (but potentially grow) their nest egg. Enter the high-yield savings account.

What are high-yield savings accounts?

As the name suggests, a high-yield savings account is a bank account available through brick-and-mortar or, more commonly, online banks that pays a higher interest rate on deposits than a traditional savings account.

Per Federal Reserve data, the average national annual percentage yield (APY) on traditional savings accounts is 0.09%. Most high-yield savings accounts have APYs around a 1.5% APY — a big difference in return. Prior to economic downturn, many high-yield savings accounts offered APYS of 2.25% or more.

So, are they a good investment?

Comparatively speaking, yes. Using the rates above as a benchmark, $10,000 in a traditional savings account would garner just $9 in interest over a year, while a high-yield savings account with an APY of 2.25% would earn you $225 in that same time frame.

"It makes a big difference," Peter Palion, certified financial planner and president of Master Plan Advisory, says. "Especially if you have a lot of money sitting in a bank that's not earning anything."

Though high-yield savings accounts have similar interest rates to certificates of deposit, they are much more liquid. You aren’t blocked from accessing your money or forced to pay a hefty withdrawal fee if you need to take money out of the account prematurely.

However, as most online banks don’t have brick-and-mortar locations and don’t offer checking accounts, getting ahold of your money may take a few days. As such, it's not always the best idea to dump all your savings into an online account, especially if your income fluctuates frequently or on the chance an emergency arises.

Palion suggests having a fund of two-to-six months of expenses in a traditional savings account, and moving the rest of your liquid assets into an account with a higher APY to build wealth.

Just one piece of the wealth-building puzzle

Though high-yield savings accounts are often a good place to park some cash, consider them only one part of your financial portfolio. Most people aren't best served eshewing longer-term investment vehicles, like an individual retirement account, for higher APYS on liquid assets. While interest rates on savings accounts won’t become negative, you could be leaving money on the table due to inflation.

“If people are concerned about what’s going on in the market, moving your money to an online bank isn’t the long-term solution,” Palion says.

Finding the right high-interest savings account

First, do your research. Make sure the account is insured by the Federal Deposit Insurance Corp. — or a comparable agency — and that there are no annual or signup fees. Some accounts have minimum balance requirements or initial deposit minimums. Interest rates also differ from bank to bank. Policygenius’ partner Even Financial can help you compare savings and money market account offers online.

Lastly, always be skeptical of deals that seem too good to be true.

“The biggest thing I would say is read the fine print,” Thomas Rindahl, certified financial planner at TruWest Wealth Management, says. “If most banks are offering rates of 2 2.25% and you see an account with rates of 5%, something is not right there.”

Want to turbo-charge your emergency fund? Here are some more ways to start building your savings.

Are APYs subject to change?

The Federal Reserve lowered its federal fund rate in response to the economic downturn. (Low borrowing rates can stimulate a struggling economy.) Though the Fed rate isn’t directly tied to interest rates for savings accounts, they are one of several factors that could encourage banks and credit unions to change APYs.

In other words, any changes in the federal funds rate could decrease (or increase) the APY on your online savings account.

Unless you lock in a fixed interest rate, as you typically do when opening a CD, then the rates can be subject to change, Palion explains. A big shift in the markets could drive down interest rates, though frequent changes would be rare.

“It’s not like they are going to be fluctuating daily,” he says. “But I would look into it before you invest.”

Never miss a money task again. Sign up for our downloadable money calendar.

Image: franckreporter