Who doesn’t want to get more bang out of their savings? Some experts say to try a high-yield savings account – but do your research first.
A high-yield savings account typically pays 20 to 25 times the national average of a standard savings account. Most often they are through online banks.
“A high-yield savings account may be a good option if you’re looking for a better interest rate on your savings. Be sure to compare rates among different accounts to find the best option for you. Keep in mind that you may also need to maintain a minimum balance to earn the higher rate,” notes Ahren Tiller, founder and supervising attorney at The Bankruptcy Law Center.
“Most importantly, know what you want out of your high yield savings account. Ask yourself: what is most important to you. Is it the high yield? Is it easy to access your funds? Do you plan on adding funds regularly? Do you plan on spending from the account?” asks Ryan Nelson, founder of personal finance platform Apy Guy.
But is it an option for you? Here is some insight from experts.
What’s the difference?
“The biggest difference is the interest rate. In a high-yield savings account, you can typically expect an interest rate of up to 20 times higher than that of a traditional savings account. You’ll also be able to withdraw and deposit funds with no restrictions or limits,” explains Tiller.
Tiller adds, “Traditional savings accounts require opening minimum deposits and restricting how many withdrawals you can make per month.”
The high-interest rate is the biggest pro of high-yielding savings accounts.
“A high-yield savings account is a good choice for anyone who doesn’t need immediate access to the cash in the account or does not plan on frequently withdrawing from it. In other words, if your needs include earning more interest on what you save while limiting your chances of incurring an early withdrawal fee, then a high-yield savings account may be a good choice,” says Jonathan Svensson, and co-founder of Almvest, a financial education website focused on investing, banking, credit cards.
Most high-yield accounts will have a lot of fees attached to them. “The best high-yield savings accounts have no hidden expenses, such as monthly fees, and demand low minimum deposits and balances. Because the best-paying savings accounts are online, most provide mobile banking apps to help you manage your money on the go. Moreover, savings account holders can effortlessly move funds between their high-yield savings account and their other bank accounts,” says Kyle Kroeger, founder of The Impact Investor.
Many high-yielding savings accounts are with online banks, so there are no physical branches to visit, which some consider a con.
These are not practical for all your banking needs; you will need to maintain a traditional checking or savings account to handle your everyday baking needs. Many online banks that offer high-yield accounts don’t offer checking accounts and few provide ATM cards.
Also, withdrawing money can be a challenge. “The cons of them is that they usually come with a fee for withdrawing money if you go over a certain number of withdrawals in a month,” says Tiller.
Adds Lauren Keys of financial blog Trip Of A Lifestyle, “It is a slightly slower process to access your money (1-3 business days) since you have to set up transfers between a local bank and the online high-yield savings account providers.”
Good for short-term goals
“This type of account is often used to save money for short-term purposes, such as a down payment on a house or car,” says Jonathan Svensson, co-founder, and partner in financial education website Almvest.