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High-yield savings accounts are often marketed as a safe, simple way to grow your wealth. While they do protect your principal, that does not mean your money is always working as hard as it could. Between shifting interest rates, fees, and missed opportunities, it is possible to lose ground without realizing it. Understanding these risks can help you make more informed decisions with your money.
Here's where people often lose money without actually losing dollars.
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How high-yield savings accounts work
A high-yield savings account, or HYSA, pays a higher interest rate than a traditional savings account by operating with lower overhead, often through online banks. The interest earned compounds, which helps balances grow faster over time. Rates are variable and can change based on broader economic conditions.
Most HYSAs are FDIC-insured up to applicable limits, which protects deposits but not purchasing power. Many HYSAs also limit features like branch or ATM access, and may not offer any other financial products.
1. The APY on your HYSA goes down
Most high-yield savings accounts use variable interest rates that can change when market conditions shift. For example, when the Federal Reserve lowers the federal funds rate, banks often reduce HYSA yields as well, even if they remain higher than traditional savings accounts.
A declining APY can quietly reduce how much interest your money earns over time. Regularly checking your rate helps ensure it still aligns with your expectations.
2. You have more than $250,000 saved up at a single bank
FDIC and NCUA insurance typically protects up to $250,000 per depositor, per institution, and per ownership category. Balances above that limit may not be insured if a bank fails.
This risk is easy to overlook when savings grow steadily over time. Spreading funds across institutions or ownership categories can help maintain full coverage.
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3. You're paying exorbitant penalties and fees
Some high-yield savings accounts charge monthly maintenance fees if minimum balance requirements are not met. Others may impose fees for excessive withdrawals or transfers. Even small fees can offset interest earnings, especially during periods of lower rates.
Reviewing account terms regularly helps ensure fees are not eroding returns. Fee structures can change over time, even if your account started with no charges.
4. You could potentially be earning a higher return at a different bank
A competitive HYSA rate today may not stay competitive forever. For example, $15,000 earning 3.75% over five years would grow to about $18,088 with monthly compounding, while the same amount earning 5% would grow to roughly $19,250.
Over time, even small rate differences can translate into meaningful amounts of money. Shopping around periodically can help ensure your savings keep pace with available options. Introductory or promotional rates may also expire, reducing returns if you don't periodically review your accounts.
5. You aren't reducing taxes on earned interest
Interest earned in a high-yield savings account is taxable income at the federal level and often at the state level. Taxes can reduce the effective return, especially for higher-income savers.
While taxes cannot be avoided entirely, strategic use of retirement and other tax-advantaged accounts can help reduce overall tax drag. Additionally, working with a financial professional could help reduce taxes owed.
6. Your bank is in financial jeopardy
Not all banks and financial institutions have the same financial strength. FDIC or NCUA insurance helps protect deposits, but it does not prevent temporary access issues during a failure.
Credit ratings from agencies like Moody's or S&P Global can provide insight into institutional stability. Reviewing public financial filings, which can usually be found on the institution's website, can also offer clues about a bank's overall health.
Bottom line
High-yield savings accounts are designed to protect your money, but they are not completely risk-free in practice. Falling rates, fees, taxes, insurance limits, and missed opportunities can all quietly reduce how effective they are as a savings tool.
Taking time to review your account terms, interest rate, and broader financial strategy can help ensure your savings are actually working to boost your bank account in a way that supports your long-term goals.
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