Cash News
If you’re looking for a safe place to keep your savings while helping it grow, you may have come across high-yield savings accounts (HYSAs). These accounts provide some of the highest annual percentage yields available today.
However, you may wonder if high-yield savings accounts are safe. After all, many HYSAs are offered by online institutions, some of which may be unfamiliar to you.
Generally, high-yield savings accounts are perfectly safe. Learn more about why these accounts are so secure and how to choose the right one.
Read more: The 10 best high-yield savings accounts available today
Why are high-yield savings accounts considered safe?
As a general rule, high-yield savings accounts are absolutely safe. However, in this digital money era, some kinks appear to still need ironing out. For instance, after the recent bankruptcy of Synapse Technology, which is a company that operates banking software for online lenders, a number of online financial institutions’ customers lost access to their money.
However, situations like this are rare. If you’re going to work with an unfamiliar online financial institution, you’ll want to scrutinize it first. As a general rule, it’s important to look for online banks with strong reputations and finances.
Read more: The 10 best online banks — ranked
In general, here’s why high-yield savings accounts have such a stellar reputation:
Insured by the federal government
In the event of a bank failure, the Federal Deposit Insurance Corporation (FDIC) guarantees deposits up to $250,000 per depositor, per institution, per ownership category. In the case of credit unions, the National Credit Union Administration (NCUA) provides similar insurance. That means if your financial institution goes under, you’ll get your money back as long as it’s under these limits.
If you have more than $250,000 in deposits, it’s important to spread that money across different banks and account types — and always ensure that your financial institution is federally insured. You can find out by using FDIC’s BankFind website tool or the NCUA’s credit union research website.
Can’t lose principal
Unlike investments, which can gain and lose value depending on how the stock market performs, you can’t lose money in a high-yield savings account due to market fluctuations. If rates are low, you may not earn as much in interest. However, the only way your balance can go down (aside from making withdrawals) is if you incur bank fees.
Hedge against inflation
This is a big reason to use a high-yield savings account. Most traditional savings accounts offer interest rates under 1%. Yet today, inflation stands at 3%, and in recent years, it hit as high as 9%.
In other words, if your savings account’s APY is less than the current inflation rate, the value of your dollars is decreasing over time and your money doesn’t go as far when you spend it.
Read more: How to protect your savings against inflation
Easy access to funds
Money in certain investments is not easy to access at a moment’s notice. With stocks, for example, you must first sell shares at the current price and then transfer the funds to your checking or savings account. Even with a certificate of deposit, you have to wait until it matures to pull your money out or else pay an early withdrawal penalty.
But a high-yield savings account allows you to withdraw money as needed. There is no fee to do so, although you may be limited on how many withdrawals you can make in a month without incurring a fee.
Drawbacks of high-yield savings accounts
In general, high-yield savings accounts are an excellent option for securely storing your savings and earning a competitive return. That said, these accounts don’t make sense in every situation. Before putting your money in an HYSA, consider these factors first:
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Interest rate: Though high-yield savings accounts are, by name, supposed to provide higher interest rates than other types of deposit accounts, rates do vary. Some banks offer HYSAs with rates as high as 5% APY or more, while others offer much less.
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Minimum balance requirements: Some banks may require you to keep a certain amount of money in your savings account to earn the highest advertised rate or require a minimum deposit to open an account. Be sure you have the cash on hand to meet minimum balance requirements.
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Fees: Most banks don’t charge monthly maintenance fees for high-yield savings accounts, but there may be other types of fees you could incur. These include excess withdrawal fees, overdraft fees, and inactivity fees, all of which cut into the profits you’re earning from interest.
Is an HYSA right for you?
The answer to whether a high-yield savings account is right for you depends on… you. If you’re looking for an account that will protect your money, hedge against inflation, and help your balance grow, an HYSA is one of the best options out there.
However, if you’re saving for a long-term goal like retirement, even the high yields of these accounts won’t be enough to get you there. For bigger savings goals with a long timeline, higher risk — but higher reward — investments are necessary.
Read more: High-yield savings account vs. investing: Which is right for you?