Pros and Cons of High Yield Savings Accounts

High Yield Savings Accounts (HYSAs) are known for offering superior interest rates on your money. Compared to standard savings accounts (like the kind your bank assigns you when you open a chequing account), HYSA interest rates offer a much more compelling way to grow your money – in fact, High Yield Savings Accounts interest rates can be 10x higher than standard savings accounts, or even more.

But while their superior interest rates are a big attraction, they do have more rules and restrictions to follow than most standard savings accounts. For example, some HYSAs have minimum balance requirements, transaction fees or limits, and slower processing times. Money market accounts and high-interest savings accounts offered by financial institutions typically provide better interest rates than traditional savings accounts. Without the burden of monthly fees, these accounts, especially high-yield savings options, are optimal choices for a bank account that grows your funds more efficiently than a regular savings account.

There are pros and cons to opening a High Yield Savings Accounts. So, before you apply to open one, let’s explore the benefits and drawbacks. Understanding these pros and cons of high yield savings accounts can help you make the best choice for your situation.

Pros of a High Yield Savings Account

Financial institutions present high-interest savings accounts and money market accounts as superior alternatives to traditional savings accounts, boasting higher interest rates. These options, including high-yield savings accounts, often come with no monthly fees, making them a savvy bank account choice for maximizing earnings over a regular savings account. High Yield Savings Accounts have some attractive benefits for account holders:

High Interest Rates for Savings Accounts

This is the big obvious benefit. With a High Yield Savings Accounts, you can grow your savings significantly faster than you could with a standard savings account. With higher interest rates, you’ll accrue more money and reach your financial goals faster. Standard savings accounts might offer less than around 0.3% interest, while a High Yield Savings Accounts can be 3% or even higher.

Incentivized Saving

Because they have higher interest rates, the more you have in your account, and the more frequently you add more, the more you’re going to end up with. High Yield Savings Accounts are easy to manage and the benefit of their high interest can work as encouragement to keep topping up your account and leaving your money in there longer to do its thing. You can also enjoy easier terms for when you want to transfer money and manage your savings and bank accounts.

Safety Net

Like standard savings accounts, HYSAs can provide you with peace of mind. While they provide a great place to easily stash your money and watch it grow, you also know those funds are just an ATM withdrawal away from being in your hands. Unlike other savings vehicles, like GICs for example, your money isn’t locked into a High Yield Savings Account. It’s a great place to hold and grow your emergency funds and is a key benefit of these savings accounts.

Easy Accessibility

Opening a High Yield Savings Account can be completed in a few short minutes, online or in-person at a bank or credit union. To open one, you just need to be a Canadian resident, have a Social Insurance Number, be the age of majority where you live, and provide proof of identity and proof of address. It is really no different than opening any other bank accounts in the country. And because you have access to your account online, it’s also super easy to move funds around and withdraw or add more savings, as needed.

Secure

A High Yield Savings Account are secure places to hold and grow your money, because they’re protected with federal or provincial insurance coverage. Most High Yield Savings Account options held with banks are covered federally by the CDIC (Canadian Deposit Insurance Corporation) for up to $100,000. Others (usually held in credit unions) are covered by their provincial deposit insurers.

Cons of a High Yield Savings Account

No financial tool or financial institution comes without its drawbacks. Here are some to keep in mind with High Yield Savings Accounts:

Minimum balance requirements

Some High Yield Savings Account setups require a minimum deposit to open the account and some need you to hold a minimum balance in your account at all times. Check with your bank or credit union what’s required before you commit to an account. This can be a disadvantage for people with smaller savings. There are also conditions where monthly account fees that need to be considered as well. But don’t be discouraged – plenty of HYSAs don’t require minimum balances, so shop around and find the right fit for you.

Transaction Restrictions

Depending on the High Yield Savings Account you choose, there may be restrictions or fees imposed on your transactions. Some financial institutions charge transaction fees – sometimes up to $5 per transaction – while others may restrict the number or type of transactions you can make to and from your account per month. There are also possible requirements for a minimum monthly balance. Always read the fine print to understand your limitations with online banking.

Lower Yield than Investing

While a High Yield Savings Account offer better yields than standard savings accounts (sometimes 10x higher, or more), their returns aren’t as high as you might find investing your money elsewhere. The trade-off is the security and peace of mind. Investing in stocks and mutual funds, for example, can earn you much higher returns – but it’s also much more volatile. Stock market investing might deliver huge gains, but it can also deliver losses at times which is how they differ from these savings account options.

What to look for in a High Yield Savings Account

When assessing your options for High Yield Savings Accounts, here are some important things to consider with your online banking:

Interest Rate and Transfer Funds

Interest rate is the big one, right? This is why we look at a High Yield Savings Account, to grow our savings more quickly. You want your HYSA interest rate to be attractive, for sure – but watch out for short-term promotional rates that may revert to a more disappointing rate when the promotional period ends. Banks will sometimes market their High Yield Savings Accounts with very high rates – as high as 6% or more. But these “introductory” or “promotional” rates will usually only run for a few months before the “real” rate kicks in. Sometimes with promotional HYSAs, the real rate will be significantly lower – as low as 0.4%. Look for a long-term rate of around 3-4%.

Online Function and Account Fees

Consider the ease of access ad provided by the financial institution’s online platform or mobile app. This will determine how convenient it is for you to manage your account and make transactions to and from your savings. It is worth considering this when looking at savings accounts that you want to utilize. A High Yield Savings Account with an online savings accounts will give you greater access and usability for this reason. It will also make it easier to achieve your financial goals.

Customer Service Representative Help

You might not think of this as a determining factor when choosing a savings account. But it’s worth thinking about. Good customer service can make or break your banking experience. We’ve all been left on hold for hours trying to get answers from telecommunications companies and airlines – and the same can happen with the wrong bank. Ensure the bank you choose has reliable and responsive customer support.

Financial Institution Reputation

It's important to choose a reputable and secure bank for your High Yield Savings Account. We all know about the big banks – but there are smaller banks, credit unions, and online financial services providers that may be worth your attention. Just because you haven’t heard of them, doesn’t mean they’re no good. Nonetheless, make sure you do your research into whoever you’re thinking of joining. Research the company as well as online customer reviews before you make a decision.

The bottom line with KOHO Savings Accounts

Deposit accounts with lower initial deposits attract customers who dislike monthly maintenance fees and seek flexibility in monthly withdrawals. Being paid monthly, these accounts balance accessibility with the potential to grow savings, offering an alternative to accounts burdened by fees or strict withdrawal limits. With the right help, your initial deposit can grow and you can take advantage of the best annual percentage yields. KOHO provides the guidance and assistance you need to grow your initial deposit.

KOHO offers a wide range of financial products. If you’re interested in HYSAs, check out the KOHO High Interest Savings Accounts. And be sure to check out KOHO’s other innovative products as well, like the Credit Building programs. Grow your financial knowledge and enhance your financial health with KOHO savings accounts and other savings accounts.