Cracking the Code of High Yield Savings

In today’s relatively volatile market, many folks find themselves looking for financial vehicles that provide stability. Of course, no investment or savings option is perfect, but among the array of options available, high-yield savings accounts stand out as a versatile and compelling choice to grow a portion of your wealth. Although they are growing in popularity, we realized that many of our readers may not understand the full benefits and risks of these types of accounts. So, in this blog post, we wanted to review high-yield savings accounts in comparison to other common savings and investment vehicles, such as Certificates of Deposit (CDs) and regular savings accounts. Weighing some of these unique considerations can help you make more confident decisions to secure your financial future.

The Basics

Before we cover some of the lesser-known aspects of high-yield savings accounts, let's start with the basics. High-yield savings accounts are a type of savings vehicle offered by banks, credit unions, and online institutions. The main thing that sets them apart from traditional savings accounts is the interest rate they offer, which is significantly higher. These accounts provide a safe and easily accessible way to grow your money while keeping it separate from your everyday spending cash, which should generally live in your checking account.

Picking a High Yield Savings Account Provider

Saving at a higher interest rate is alluring and practical, but how do you know which institution to open the account with? There’s not a perfect answer to this question, but we do have a list of considerations that should help you make the decision:

• Interest Rate: The number one reason for opening a high-yield savings account is to earn a competitive interest rate, so it’s very important to do some preliminary research and compare across providers. Keep in mind that rates can change, so it’s important to look at historical information and choose an institution with a history of competitive rates over time. Additionally, look for sign up bonuses and referral promotions- many providers, like Marcus by Goldman Sachs, offer big temporary rate boosts for opening new accounts, depositing a minimum amount, and/or referring friends and family members to open accounts. These bonuses can be used to maximize savings over a limited period of time.

• Fees: Look for an institution that offers high-yield savings accounts with no fees. Common fees to watch out for include monthly maintenance fees, account inactivity fees, and excessive withdrawal fees.

• FDIC or NCUA Insurance: Just like other savings vehicles, you should ensure that your chosen high yield savings account is insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions. This insurance protects your savings up to $250,000 per depositor, providing essential security.

• Minimum Balance Requirements: Check the minimum balance requirements for the account. Some institutions may require a specific minimum balance to open the account or to avoid fees. Choose an account that aligns with your financial situation and goals.

• Accessibility: Consider how you can access and manage your account. Online banks often provide convenient 24/7 access through web and mobile apps. Traditional banks may offer both online and in-person access. We almost always recommend online banks for high yield savings accounts, but you should make sure your chosen institution's accessibility matches your preferences.

• Customer Service: Assess the quality of customer service and support. Reliable customer service can be crucial if you encounter issues with your account or have questions. Read reviews and consider contacting the institution's customer service department to gauge their responsiveness.

• Account Features: Evaluate additional features that come with the account, such as the ability to set up automatic transfers, link external accounts, and receive electronic statements. These features can enhance your account management. While these are mostly standard with popular providers, it’s always worth double checking to make sure the features that matter most to you are available.

• Withdrawal Conditions and Transfer Times: This is a big one that is often overlooked. Although you don’t want to be withdrawing frequently from a high yield savings account, part of their advantage is that your money can be made available to you without penalty. Find out how quickly the institution processes transfers and withdrawals. Faster access to your funds can be essential in emergencies or when taking advantage of other investment opportunities. Carefully read and understand the terms and conditions of the high-yield savings account, including any withdrawal limits or restrictions.

• Online Security: With online accounts, ensure that the institution has robust online security measures in place to protect your personal and financial information, including 2SV or passkeys for sign in. Make sure you add recovery information to your account, like a phone number and email address.

• Reputation and Reviews: Research the institution's reputation and read reviews from existing customers, and ask around in your own social network. If you are already working with a financial advisor, see who they recommend and why.

• Interest Rate Consistency: This is another important point of consideration. Some institutions offer shiny promotional rates that drop drastically after a certain period. Make sure you understand the rate structure and whether the high yield is likely to be sustained. 

• Additional Account Options: Consider if the institution offers other financial products, such as checking accounts, certificates of deposit (CDs), or investment opportunities. Having multiple accounts at the same institution can simplify your banking and mental load, speeding up decision making and helping you stay organized. Once again, your financial advisor may already have an institutional preference, so make sure you ask if that’s the case before opening an account. 

Advanced considerations for high yield savings

Now, we’ll venture a bit into the uncharted territory of high-yield savings. In this section, we’ll cover some of the main benefits, risks and use cases for these accounts.

Benefits beyond high interest rates

• The Power of Compound Interest

While most people are aware of compound interest, few realize its true potential. With high-yield savings accounts, the interest is often compounded daily or monthly, rather than annually, which can significantly boost your earnings. To illustrate, let's say you deposit $10,000 into a high-yield savings account with an annual interest rate of 2.5%. After one year, you'll have earned $250 in interest. But, with daily compounding, you'll actually earn slightly more, around $253.62. Over time, this seemingly small difference can lead to substantial gains.

• Link to Your Investment Portfolio

For those with investment portfolios, high-yield savings accounts offer a unique bridge between risk and security. Parking a portion of your portfolio in a high-yield savings account can balance out the volatility of investments. When the market experiences a downturn, you have readily available funds in a safe, interest-earning account.

• Emotional Peace of Mind

While not a financial metric, peace of mind is invaluable. High-yield savings accounts offer a sense of security and predictability that few investments can match. This emotional comfort may be particularly valuable during economic uncertainties or short term needs, providing you with a financial safety net.

• Liquidity and No Lockdown Period

These accounts allow you to access your money easily, and shouldn’t require you to keep your money locked down for any given period of time.

Risks associated with high yield savings

• The Risk of Opportunity Cost

This is really the big risk associated with high yield savings: the potential to earn more through another vehicle, like a taxable brokerage. Opportunity-cost refers to the potential loss of gains when money is tied up in low-interest accounts. Although high-yield savings accounts help you mitigate this risk compared to traditional savings accounts, you will still be leaving your money somewhat idle compared to potential (and riskier) growth opportunities in the market. 

• Variable Interest Rates

High yield savings rates are typically dependent on current economic conditions, meaning that as the Fed raises interest rates, so too will your high yield savings rate increase. However, in times of low interest rates, this also means that you will be earning less. There’s no guaranteed return over an extended period of time, unlike alternative options like CDs. 

Practical use cases

The sweet spot of high yield savings accounts really lies in the balance of short term gains and needing quick access to funds. Anytime you want to be keeping up with or outpacing inflation with your savings, but also maintaining the ability to liquidate that cash on a tight timeline, high yield savings accounts are probably the right choice. Here are a few practical examples: 

• Emergency Funds

Many people store their emergency funds in traditional savings accounts, which tend to earn paltry interest rates (often not even keeping up with inflation). However, high-yield savings accounts offer a much better place for your emergency fund. Not only can your money grow over time, but it remains easily accessible when you need it most.

• Short Term Investments and Savings for Specific Items

Let’s say you know you want to put a down payment on a new car this year, but you’re not exactly sure which month you’ll buy it. Putting that cash into a high yield savings account can be a great place for this money to work for you over a short timeline, and be easy to withdraw whenever you’re ready for your big purchase.

• Shared Accounts with Family Members or Friends

Saving up for a mega vacation, a wedding, or moving a parent into a long term care facility? Once again, a high yield savings account can be a great place to store this money. Especially online high yield savings accounts, where deposits can be made easily by multiple people.

…but what about CDs?

We can’t write a blog about high yield savings accounts without briefly mentioning another fantastic savings option: Certificates of Deposit, or CDs. CDs are time-bound savings options, also offered by banks, credit unions, and online institutions. Here's how they compare:

Advantages Over High Yield Savings:

• Higher Fixed Interest Rates: CDs almost always offer fixed, higher interest rates compared to regular savings and high yield savings accounts. This means you’ll typically earn more money over time in a CD.

• Low Risk: Your principal investment in a CD is insured in the same way as other savings accounts, and you won't lose the initial deposit, making them low-risk investments.

• Guaranteed Returns: With a fixed term, CDs offer predictable, guaranteed returns upon maturity.

Cons:

• Lack of Liquidity: This is the big differentiator. CDs come with a hefty penalty for early withdrawal, which limits your access to funds in case of emergencies or unknown timelines. You have to be absolutely certain that you want to stay invested for a minimum amount of years. 

• Opportunity Cost: Similar to savings accounts, CDs offer safety, but they may provide lower returns than other investment options, especially over longer time horizons. Additionally, the variable interest rates and promotions associated with high yield savings can sometimes out perform CDs over similar time periods, depending on how economic shifts affect rates. 

In summary, high-yield savings accounts may not be the flashiest investment option, but they should be an essential option in any household’s financial toolkit. The hidden potential they offer in the form of compound interest, a reinforced emergency fund, a buffer for your investments, protection against opportunity cost, and emotional peace of mind makes them a unique and underrated choice for savvy savers. Additionally, they aren’t complicated! Normally when we make recommendations about investment tools, we recommend talking to a financial advisor to understand more. In this case, we still recommend that, to understand how high yield savings can fit into your bigger wealth picture, but we also suggest talking to friends and family members who may have a high yield savings account already. This is a very accessible financial tool that you should feel comfortable exploring on your own.

Remember that deciding on the best savings or investment vehicle should align with your financial goals and risk tolerance. High-yield savings accounts are excellent for their competitive interest rates, liquidity, and safety. CDs offer fixed returns but come with limited access to funds. Regular savings accounts provide accessibility but typically have lower interest rates. Ultimately, the ideal choice for you depends on your unique circumstances. High-yield savings accounts often strike a balance between earning potential and accessibility, making them a compelling option for both short-term savings goals and emergency funds.

Follow our Instagram for personal finance tips and inspiration.

Madison Elliott is a UX Researcher at Google. Madison consults on data engineering and usability at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. Madison brings her combined background in cognitive science, computer science and clinical psychology with her professional UX design and engineering experience to optimize workflows at Mana FLD and improve people’s lives.