“Understanding High-Yield Savings Accounts: Benefits, Risks, and Alternatives”

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Can You Lose Money in a High-Yield Savings Account?

High-yield savings accounts are generally a safe way to save your money. They are not tied to the stock market, so your balance is protected from market volatility. Additionally, most banks and savings associations in the U.S. offer Federal Deposit Insurance Corp. (FDIC) insurance. With an FDIC-insured account, your money is protected even if the financial institution fails.

Many high-yield savings accounts are available through online banks, though some brick-and-mortar financial institutions offer them as well. Interest rates and fees can vary.

4 Benefits of High-Yield Savings Accounts

High-yield savings accounts offer several advantages:

1. Your Money Is FDIC-Insured

FDIC insurance provides coverage of up to $250,000 per depositor, per ownership category at each FDIC-insured bank. If an FDIC-insured bank fails, the account holder doesn’t have to do anything. Insurance will kick in automatically, and it typically takes up to two business days to receive the funds. Those who have more than $250,000 in deposits could spread their money across different banks to maximize the coverage of FDIC insurance.

2. There’s No Exposure to Market Volatility

Investment vehicles like retirement accounts, brokerage accounts, exchanged-traded funds, and mutual funds all provide exposure to the stock market. Your money is invested, so the balance can go up and down with regular market activity. High-yield savings accounts, on the other hand, are not tied to the stock market. As such, the risk of losing money is extremely low. Even if your financial institution fails, FDIC insurance can cover a large portion of your losses.

3. They Offer Higher-Than-Average APYs

The biggest draw of a high-yield savings account is that the annual percentage yield (APY) tends to be higher when compared with traditional savings accounts. That number represents how much you’ll earn in interest over a 12-month period. At the time of this writing, some high-yield savings accounts have APYs as high as 4.85%. That means you’d earn $48.50 each year for every $1,000 in the account. Meanwhile, the average APY on a traditional savings account is only 0.40%, according to the FDIC.

4. They Provide Relatively Easy Access to Funds

With a high-yield savings account, accessing your money shouldn’t be too complicated. You can likely link it to your checking account and pull funds on an as-needed basis. Just be aware that your financial institution may limit how many free transfers you can make each month. You can also withdraw money through an ATM or local branch if they’re available to you.

3 Risks of High-Yield Savings Accounts

Despite their benefits, high-yield savings accounts do have some drawbacks:

1. Inflation Can Eat Away at Your Savings

Inflation chips away at your purchasing power. Case in point: $100 today probably won’t buy you as many groceries as it did a couple of years ago. The Federal Reserve aims to keep the annual rate of inflation at 2%, but in April 2023, consumer prices were up 4.9% from a year earlier. If the bulk of your wealth is in a high-yield savings account, inflation could gradually deteriorate its value. That’s why diversification is so important. Investing in other assets can generate returns that help offset the effects of inflation.

2. You Might Get Better Returns With Other Investments

The interest you might earn with a high-yield savings account is probably lower than what you could earn with other investments. The stock market, for example, has delivered average annualized returns of around 10% for the last century. However, individual stocks are considered high-risk assets. The same goes for cryptocurrency, real estate, hedge funds, and other high-return investments. Holding a variety of different investments can help mitigate risk and keep your portfolio balanced. The right mix for you will depend on your age, financial goals, and appetite for risk.

3. Some Financial Institutions Charge Fees

Some high-yield savings accounts come with fees, so it’s wise to compare financial institutions before opening an account. Some may charge a monthly service fee or require a minimum account balance to qualify for a certain APY. Others may limit how many free transfers and withdrawals you can make per month.

Other Low-Risk Ways to Grow Your Savings

High-yield savings accounts aren’t the only option if you’re looking to save money without a lot of risk. Other choices include:

Bonds

These are debt securities that are sold by corporations and government agencies. When you buy a bond, you’re loaning money to the organization that issued it. They’ll eventually repay you with interest. Bonds are considered low-risk investments. From 1950 to 2022, the average annual return for bonds was 5.5%, according to J.P. Morgan.

Money Market Accounts

This type of account earns interest like a savings account. But like a checking account, most come with a debit card or checkbook as well. Money market accounts are accessible and can also be a good place to grow your savings. Some money market accounts currently offer rates as high as 4.75%.

Certificates of Deposit (CDs)

A CD earns interest but requires you to keep your money in the account for a certain amount of time. That can be anywhere from one month to five years. Withdrawing funds before the maturity date typically triggers a fee. At the time of this writing, some CDs offer up to 5.20% APY.

The Bottom Line

A high-yield savings account is considered a safe place to hold your savings. Interest rates are typically higher than traditional savings accounts, and most accounts are FDIC-insured. Just be sure to compare fees and ATM accessibility before opening a high-yield savings account.

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