High-yield savings accounts (HYSAs) are a much-loved financial tool among eager savers. And for good reason: These accounts currently yield around 40 times the annual returns of some traditional savings accounts.
High-yield savings accounts aren’t without disadvantages, though. For example, it’s hard to find these accounts at brick-and-mortar banks. Often, you have to commit to banking online if you want the best rates.
And although they offer higher-than-average interest rates, the returns you can earn from an HYSA won’t match what you’d earn by investing in the stock market long term.
So, should you open a high-yield savings account? It depends on your personal financial goals and circumstances. For many people, the answer is yes — but if you’re on the fence, here’s a guide to help you decide.
HYSAs are versatile accounts that can benefit a wide range of savers. If you don’t already have one, here are some scenarios that might prompt you to open a new account.
If your “savings” is currently hiding in your checking account, it’s time to separate your cash into a dedicated account.
Your checking account is for paying bills and managing everyday transactions, not saving for specific goals. Having a separate savings account helps you stay on track toward these savings goals, ensuring you don’t accidentally spend your emergency fund on concert tickets or a vacation.
Plus, you’ll almost always earn higher interest rates with an HYSA, as checking accounts rarely pay interest.
If your current savings account isn’t earning at least 3% to 4% APY, you’re leaving money on the table. Switching to one of today’s best high-yield savings accounts could help you earn more and grow your balance faster. While a few percentage points may not feel like much, it can amount to hundreds or even thousands of dollars in extra earnings over the years.
HYSAs are ideal for short-term goals; your money is easily accessible when you need it and earns competitive interest when you don’t. Don’t make the mistake of saving for short-term goals in a checking account — where your money won’t earn anything — or in an investment account where it could lose value before you need it.
4. You want low fees and minimum deposit requirements
If you’re looking for an account with few fees and low or no minimum deposit requirements, focus on HYSAs — particularly those offered by online banks. Financial institutions offering these accounts can often minimize fees for the same reason they can offer higher returns: They don’t face the overhead costs of maintaining physical branches.
Read more: How to open a high-yield savings account: Step-by-step guide
While HYSAs are valuable for many, there could be times when you don’t need or want to open one.
If you’re already earning 4% APY or higher on your savings, you probably don’t need a new high-yield savings account. You may either already have an HYSA or another account, such as a money market account or cash management account, both of which offer similar returns and accessibility
Most high-yield savings accounts are offered online, which may be a deterrent if you prefer in-person banking.
If you prioritize banking in-branch over getting the highest return on your savings, an HYSA may not be the best choice. (However, it may be worth looking for an HYSA at a local credit union, which may offer high returns and branch access.)
If you’re focused on a long-term goal, such as saving for college or retirement, a high-yield savings account isn’t the best tool for the job. While HYSAs offer competitive interest rates when it comes to insured bank products, they don’t earn enough to serve as your primary retirement account — nor do they offer the same tax advantages.
For longer-term goals, you’ll generally be better off putting your money into your 401(k), IRA, or other investment accounts.
It could be worth putting money into a high-yield savings account, but it depends on your goals and circumstances. If you’re focused on saving for short-term goals, like emergencies and vacations, an HYSA is generally a good choice. It’ll earn more interest than a traditional savings account, offer federal insurance, and be accessible when you need it.
Read more: How much money should you keep in a high-yield savings account?
As long as you open your high-yield savings account at an insured bank or credit union, your account balance will be guaranteed up to $250,000 in the event of a bank failure. However, it is possible to lose money in an HYSA if your financial institution charges certain fees, such as monthly maintenance fees or paper statement fees.
Read more: Can you lose money in a high-yield savings account?
401(k)s and HYSAs serve two different purposes, so it’s not a matter of choosing one or the other. An HYSA is best for short- and medium-term savings goals, such as an emergency fund, vacation, or down payment.
Meanwhile, a 401(k) is designed for long-term retirement savings. With a 401(k), you invest your money in stocks, bonds, and other securities, so there’s more risk involved. If you don’t yet have an HYSA or investment account like a 401(k), it’s generally better to set aside some short-term savings before investing.
Read more: Can a high-yield savings account replace your 401(k)?
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