High-yield savings accounts are currently a very popular tool for people wanting to hold cash. Whether your goal is to build an emergency savings account or to find an outlet from the volatility of the equities markets, these can be a great way to earn money and potentially outpace inflation. Traditional savings accounts, where historically many people store their emergency savings account, are also still used frequently.
Many people have historically used traditional savings accounts but are not as familiar with the distinctions and differences that a high-yield savings account offers. High-yield savings accounts offer a tempting alternative to a traditional savings account, promising significantly higher returns on your savings, but are they the right choice for you?
The Interest Rate Advantage
The most significant difference between these two accounts lies in their interest rates. Regular savings accounts, often offered by brick-and-mortar banks, tend to have interest rates hovering around 0.01% to 0.25%. This means for every $1,000 you save you might only earn a few dollars in interest each year. High-yield savings accounts, on the other hand, boast much higher rates, currently ranging from 4.00% to 5.00% or even higher. This translates to a substantial difference in the long run.
Imagine you have $10,000 that you would like to save in a cash equivalent account – meaning the money in the account has very little market risk of decreasing. In a regular savings account with a 0.10% interest rate, you'd earn $10 per year. In a high-yield savings account offering 4.00% interest rate, you'd earn $400 per year, or 40 times that amount! Over time, with compounding interest (interest earned on your interest), this disparity becomes even more significant.
Minimum Balances, Liquidity, and Fees
While high-yield savings accounts offer a clear advantage in terms of interest rates, certain high-yield savings accounts can come with some drawbacks. Here are a few key items to look for before opening a high-yield savings account:
- Minimum Balance Requirements: Unlike traditional savings accounts that often have low or no minimum balance requirements, some high-yield savings accounts may set a hurdle. Failing to maintain this minimum balance could result in a penalty or forfeiture of some of your interest rate.
- Liquidity: Regular savings accounts generally offer high liquidity, meaning you can easily access your funds through withdrawals or debit card purchases. Some high-yield savings accounts may limit the number of withdrawals you can make per month. This can be a drawback if you need immediate access to your account.
- Many traditional savings accounts boast low or no monthly maintenance fees. Meanwhile, fees are more common in high-yield savings accounts. Some high-yield savings accounts may have monthly maintenance fees, setup fees, or transaction limits before a fee is charged.
Participating Banks
Most banks currently offer a version of a high-yield savings account. What we have seen is many brick-and-mortar banks offer these at a lower interest rate than some of their online-only counterparts. If you are comfortable with an online-only bank, meaning you’ll never walk into a branch of your bank for a deposit or question, you can likely get a higher interest rate on your account.
Should a High-Yield Savings Account Make Up My Entire Portfolio?
With interest rates in the 4.00% - 5.00% or greater range, you may be thinking that it could be a good idea to go “all-in” on a high-yield savings account. While we agree that this is a great spot for an emergency savings account for most people, remember these interest rates are typically not locked in. Rates vary as the Federal Reserve makes changes to the Discount Rate. Current rate offerings are higher than historical averages, so this could be a short to mid-term move to store your savings in a high-yield account. We do not recommend exiting the equities market completely as outpacing inflation remains extremely important to any financial plan.
Conclusion
Many high-yield savings accounts are offering high interest rates without fees or minimums associated, but researching and reading the fine print of the bank’s offer before diving into a high-yield savings account is extremely important. If you are willing to part with the familiarity of a local brick-and-mortar bank, the interest rate you receive from an online-only bank could be advantageous. Before making a change, please setup time to meet with your financial advisor as each person’s financial situation is different.
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