With the Fed Cutting Interest Rates, What Are the Pros and Cons of a High-Yield Savings Account?

Deciding where to put your hard-earned money can be complicated, but there is a strong argument to be made that at least some of it belongs in a high-yield savings account.

While high-yield savings accounts aren’t perfect, and they aren’t the right place for all of your funds, they are the perfect choice for certain kinds of accounts like your emergency fund and saving for short-term needs.  If you aren’t sure what’s best, check out these pros and cons of high-yield savings accounts so you can decide what’s right for you. 

Pros of high-yield savings accounts

Here are some of the biggest benefits of high-yield savings accounts:

• You’ll earn very competitive yields. While the national average rate paid on savings accounts is 0.42% according to the FDIC, high-yield savings accounts often pay 10 times that amount. While putting money in a standard savings account can often cause you to lose buying power because your ROI is below the rate of inflation, high-yield accounts often allow you to beat the inflation rate so you actually enjoy some gains. 
• Your money is accessible. Unlike CDs, you can take money out of your high-yield savings account whenever you need it. If you have an unexpected expense or are ready to make a purchase, your funds are there and ready for you. 
• Your money is not at risk. As long as you select an FDIC-insured high-yield savings account and keep your deposits below the insured limits, you cannot lose money in a high-yield savings account. This is not the case for money in a brokerage firm, or even in a CD since you can lose some of your investment in a CD if you take money out before earning enough interest to cover the pre-payment penalty. 
• You can find fee-free accounts with generous benefits. Many high-yield savings accounts are offered by online banks that offer great perks for customers. For example, you usually won’t have any account maintenance fees or minimum balance requirements to worry about if you pick the best high-yield savings account. Some online banks providing these accounts also offer other member benefits, such as free financial advice or discounts on loan products. 

Passing up these benefits can be short-sighted. If you have money that you are saving for emergencies or for any big purchase you plan to make in the coming two to five years, a high-yield savings account is likely the best place for those funds to be. 

Cons of high-yield savings accounts 

There are also some disadvantages of high-yield savings accounts as well. Here are some downsides:

• Your returns are limited. While you should earn better yields in a high-yield savings account than a standard savings account or checking account would pay, you aren’t going to earn as much as you would if you put money into a brokerage account and bought equities. Of course, you do take a risk of losing money with equities, which means that you shouldn’t typically put money into the market unless you can afford to leave it invested for a while in case your market timing is bad and you invest right before a crash. 
• Your rate is not guaranteed. High-yield saving accounts are variable rate accounts. Your rate could go down over time, unlike with a CD that locks in your rate for the duration of the CD term. 

These are definite disadvantages, and you should think about putting some money into equities or even CDs so you have capital that earns you higher returns or a guaranteed return.

Ultimately, you need to consider the purpose of the funds you’re putting into your accounts to decide where the money belongs. Retirement funds, for example, should not be in a high-yield savings account when you’re decades away from retirement, because you’d limit your returns too much to build wealth. For money you’ll need soon, though, there’s no reason not to maximize your returns, avoid fees, protect against risk, keep your money available, and earn member benefits by finding a high-yield savings account offering high rates and great perks.