Is a High Yield Savings Account Worth It?

Interest rates are at historic lows, particularly when it comes to the interest paid on bank deposits. 

Even if you have a decent chunk of change sitting in your savings account, you may only earn a few cents of interest per month — hardly enough to make a difference in reaching your savings goals. 

As of the time of this writing, the average savings account interest rate was just 0.06%. On a $1,000 deposit, that’s just $0.60 in interest per year. 

Fortunately, there’s an alternative: High-yield savings accounts (HYSA). 

But are these accounts worthwhile? What are the pros and cons of high-yield savings accounts? 

What is a high-yield savings account?

A high-yield savings account is simply a savings account that pays higher interest rates than traditional savings accounts. Currently, top HYSA options pay around 10x the national average.

This means that if the average savings account pays around 0.06%, some high-yield savings accounts pay around 0.60%. It’s not a ton of interest, by any means, but it’s still 10 times as much as is offered by traditional savings accounts! 

Note: Interest rates change frequently. You can see a list of the current best high-yield savings accounts here. 

What banks offer high yield savings accounts?

Many banks offer high-yield savings accounts. However, the accounts are more commonly offered by online banks than by traditional local banks. 

This is one of the downsides of these accounts: You’ll usually need to open an account at a new bank to take advantage of these rates (unless your bank happens to offer one!) .

For example, let’s say you have a checking and savings account at Bank of America. You see that Discover is offering a better rate on their high-yield savings account, so you decide to open a new account with Discover. 

While this can seem like a hassle, it can also be a benefit — because it keeps your savings separate from the rest of your finances. This can make it easier to meet your savings goals and avoid spending the money in that account. We cover the full pros and cons of a high-yield savings account below.

Pros and cons of high-yield savings accounts

Advantages

• Pays significantly higher interest rates than standard savings accounts

• Many accounts have no monthly fees

• Interest rates may rise in the future as overall interest rates increase

• Occasionally offers sign-up bonuses for new account holders

• Can help you keep your money “out of sight, out of mind,” making it easier to avoid spending your savings

Disadvantages

• Requires opening a new account

• Usually requires switching to a new bank

• Can add a bit of complexity to your financial situation 

• You’ll be sent a 1099-INT tax form if you earn more than $10 in interest in a given year

When a high-yield savings account makes sense

Considering the pros and cons of high yield savings accounts, when does it actually make sense to use one? Here are some specific situations when making the switch is worth the effort. 

When you have large cash savings

If you have a substantial amount of savings, the extra interest you earn can add up quickly. For instance, if you have money set aside for a down payment or other mid-term financial goals, an HYSA can help you grow your savings quicker. 

When you prefer low-risk investments

Over the long term, investing in the stock market will generally grow your money more than any savings account. However, investing in stocks comes with risk and volatility. A high-yield savings account pays predictable, steady interest — and it’s FDIC insured up to $250,000 per account. 

When you want to keep savings separate

It can be helpful to have a separate account — even at a separate bank — for your savings. This separation can make it easier to stick to your goals and avoid spending your hard-earned savings. 

When you value liquidity

Liquidity refers to how easy it is to access money. Assets like real estate aren’t very liquid; they take time to sell. Money in a high-yield savings account is liquid and available at any time (though it may take a day or two to transfer to a checking account). Compared to alternatives like CDs (certificates of deposit), high-yield savings accounts are highly liquid. 

When it’s best to avoid an HYSA

These accounts offer many benefits, but they’re not for everyone. Here are some situations where it may make more sense to avoid an HYSA. 

When you want to keep things simple

Opening an HYSA usually involves opening an account at a new bank. If you prefer to keep your finances as simple as possible, this is a notable downside to consider. 

When you have little in savings

If you don’t have much saved, the difference in interest on a high-yield account will be fairly minor. For instance, if you have $500 in your savings account, you’d earn roughly $3 per year at current rates. In most cases, the hassle of switching banks won’t be worthwhile for those with smaller account balances. 

When you prefer to invest (and are comfortable with risk)

If you are comfortable with taking more risks with your money, there are investment options that may be more lucrative. For instance, the US stock market has averaged returns of approximately 10% per year over the last century — about 20x what high-yield savings accounts are paying today. However, investing isn’t for everyone, and comes with more risk. 

Please note: The information presented in this article should not be considered as investment, legal or accounting advice. Please consult with your financial advisor regarding your financial situation before making any investment-related decisions.

Mastering your money

Weighing the pros and cons of a high-yield savings account is an important step toward making your financial dreams a reality. 

Want to learn more about personal finance, money management, debt payoff and more? The Score Blog from Tally is a great place to start! 

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