Can High-Yield Savings Accounts Lose Money?
Understand the security of high-yield savings. Learn how account value can be affected and the robust protections for your deposited funds.
Savings accounts are often seen as secure, protecting the original deposit. Many rely on them for short-term goals or emergency funds, assuming complete safety. This perception leads to questions about whether funds can diminish. Understanding these accounts is important for anyone managing finances effectively.
Understanding High-Yield Savings Accounts
A high-yield savings account offers a significantly higher interest rate than traditional savings accounts. Online-only banks often offer these accounts due to lower overhead. Interest is compounded, meaning you earn interest on your initial deposit and accumulated interest, allowing money to grow faster.
Funds remain accessible for withdrawals or transfers, offering liquidity. Some banks may limit monthly withdrawals, but these accounts are suitable for near-term funds. The annual percentage yield (APY) reflects the actual rate of return, considering compounding, and can fluctuate with market conditions.
Factors Impacting Purchasing Power
While the nominal balance in a high-yield savings account does not decrease, its real value or purchasing power can be eroded by external factors. Inflation is a concern, as it represents the rising prices of goods and services, causing currency’s purchasing power to fall. If the interest rate is lower than inflation, your money will buy less in the future, even with a higher balance. This means the real return on savings could be negative.
Account fees can also reduce the balance. Common charges include monthly maintenance fees, sometimes waived if conditions like a minimum balance or direct deposits are met. Other fees include excessive transaction fees for exceeding withdrawal limits or dormant account fees for inactive accounts. These charges diminish the principal, impacting overall savings.
Protections for Your Principal
The principal in a high-yield savings account is protected from loss due to bank failure through federal deposit insurance. The Federal Deposit Insurance Corporation (FDIC) covers accounts at FDIC-insured banks. The National Credit Union Administration (NCUA) offers comparable insurance for credit union accounts. This insurance ensures depositors do not lose money if the financial institution becomes insolvent.
FDIC insurance covers up to $250,000 per depositor, per FDIC-insured bank, for each account ownership category. This limit applies to all deposits held by one person in the same ownership category at a single bank, including savings, checking, money market accounts, and certificates of deposit. Coverage includes the principal and accrued interest, securing funds against institutional failure.