Pros and Cons of High Yield Saving Accounts

What’s a High Yield Savings Account?

A high yield savings account is a bank account that is setup to maximize the return from an APY. They are FDIC insured bank accounts that provide consumers with a better yield than your typical 0.25% from a checking account but do not necessarily require you to lock your funds up like a CD. Many of these accounts have become much more flexible in regarding withdrawals. These accounts differs in that they will beat out your standard checking account APY but don’t offer all the same benefits as checking accounts. Settlement times for withdrawals and transfers will typically take longer and some special purpose high yield accounts can have quite a few restrictions on how many times you can withdraw funds, etc.

What Are the Benefits?

You are getting a much better APY than a traditional checking account, although this is still unlikely to beat out what you pay to borrow money by a long shot (this spread is what helps banks make money). Nonetheless, high yield savings still provide good yields in relation to the amount of flexibility you receive with your money. So, if your money is just going to sit in a checking account as opposed to a high yield account, you are at least seeing some positive effects from the compounding interest. Otherwise, you'll also have a bank account with a decent yield that isn’t locked into a CD for a set period of time.

What Are the Downsides?

These banks usually do not have physical retail locations or ATMs for withdrawals. Transfers and settlement of funds typically take longer than your standard ACH (1-2 extra days for settlement of funds usually). Depending on the yield, you are usually restricted to a set amount of withdrawals under federal savings account guidelines. This can actually vary by bank but you are usually restricted to 6 withdrawals per period. Some high yield savings accounts with better yields may be even more restrictive than this.

What Should Consumers Look for?

Consumers should look for high yield savings accounts that have great APY’s and are comparable to CDs. They should also look for accounts that offer a good amount of flexibility in regards to how you can access your funds.

Also, make sure you understand the difference between a compounded daily APY and compounded monthly APY. It's also important to know the difference between an APY and APR. Although this may be insignificant with smaller balance accounts, assuming the APY is compounded and adjusted daily it will yield more than an account that does this on a monthly basis. This is also a great benchmark to use when deciding on a high yield account since it will show the “real” rate of return, which you can expect from the account’s APY.

Finally, although they are better than most checking and savings accounts in terms of interest accrual, you are probably better off doing other things besides lending if you are looking for a return on your money. Although not everyone likes to take the risk you may be better off just leaving the funds in your checking and or look to invest the remaining amount into equities, cryptocurrencies, etc. High yield saving accounts certainly have their drawback and are quite limited in the return they can provide investors.