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Why a high-yield savings account is better than these 4 popular alternatives

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The right high-yield savings account could be your best option in today's high-rate environment. Getty Images/iStockphoto

Issues with elevated inflation and interest rates have made it hard for many Americans to make ends meet. However, one perk of the current environment is the higher yields on high-yield savings accounts (HYSAs).

"Currently high-yield savings account rates are over 5% in some cases, while a standard savings account in a brick-and-mortar bank may be 0.1%," says Jay Zigmont, Ph.D., certified financial planner, and founder of Childfree Wealth. And, high-yield savings accounts are a great place to keep your emergency savings and money for short-term goals, Zigmont says.

Plus, these accounts offer the security of deposit insurance. "Your money is secure in a high-yield savings account, as it's insured by the FDIC up to $250,000 for individual accounts and $500,000 for joint accounts," says Erik Croak, certified financial planner, accredited wealth management advisor, and president of Croak Capital.

But is a high-yield savings account the best choice for your situation?

Compare your top savings account options and start earning today.

Advantages of high-yield savings accounts over four popular alternatives

High-yield savings accounts offer a few unique advantages over other popular types of accounts, including:

  • Traditional savings account: While traditional savings accounts currently have an average national interest rate of 0.47%, the best high-yield savings accounts have a return rate that's about 10 times higher.
  • Certificate of deposit (CD) account: Traditional CDs require you to make a deposit and leave it in the account for a specific term. If you need the money early, you have to pay an early withdrawal penalty. With high-yield savings accounts, you can add money over time and withdraw it without penalties. "Liquidity is valuable because it allows you to withdraw your cash if you're in a pinch," says Daniel Masuda Lehrman, certified financial planner at Masuda Lehrman Wealth. 
  • A money market account: You can find money market accounts with rates that compete with high-yield savings accounts, but they often come with additional requirements. For example, they may require a minimum deposit, minimum ongoing balance and/or payment of a monthly service fee. 
  • A high-yield checking account: High-yield checking accounts tend to offer much lower annual percentage yields (APYs) than high-yield savings accounts. Higher-APY offerings do exist but they're harder to find and may come with a variety of requirements. Checking accounts also allow for easier access to your money which may not be ideal for those looking to save. 

Learn more about how the best high-yield savings accounts can benefit you now.

Other considerations

While high-yield savings accounts have many perks, there are also a few potential drawbacks to consider. 

For one, some financial institutions limit the number of withdrawals you can make from your high-yield savings account per month. The Federal Reserve removed the numeric limits on convenient transfers or withdrawals from "savings deposit" accounts in 2020, but some institutions still have them in place. Ally, for example, allows 10 withdrawals or transfers from a savings account per cycle. If you exceed the limit, the bank may close your account. 

Next, the best high-yield savings account rates often come from online banks, credit unions and smaller banks. If your high-yield savings account ends up at a different bank than your checking account, transfers may take several business days to complete. 

Further, you can't lock in a rate with a high-yield savings account like you can with a CD. Your rate is variable so it will fluctuate with the market. While that can be helpful when rates go up, it will reduce your earnings when rates go down. 

"The Fed is shouting from the rooftops that interest rates will fall in the near future. For that reason, right now CDs are an attractive choice instead of, or in addition to, a high savings account," says Lisa Whitley, accredited financial counselor and chartered retirement planning counselor at Money by Lisa. 

Is a high-yield savings account right for you?

A high-yield savings account can be a helpful place to house your short-term savings — especially when rates are higher than usual. 

"I always love a high-yield savings account for money that you anticipate spending in the next couple of years, or for funds with which you simply can't take any risk. For example, your home down payment fund," says Whitley. 

It's also a good account for retirees who are drawing down their retirement funds, according to Whitley. 

"Keep one or two years of living expenses to mitigate against the 'sequence of return' risk. That is, the risk that you would have to sell your stock holdings just at the time a 'black swan' event hits the market and prices have sunk," Whitley says. 

But high-yield savings accounts aren't to be confused with wealth-building accounts, Whitley says. 

"Let's be clear: the point of your cash savings is not to earn a lot of money. It's a buffer against bad times and a safe place to accumulate funds for a future must-have expense."

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