Is There Any Risk to a High Yield Savings Account?

A high-yield savings account (HYSA) offers a higher interest rate than traditional savings accounts. These accounts provide a place for liquid savings, allowing individuals to grow their money while maintaining easy access to funds. Many consider HYSAs for their savings goals, leading to questions about their safety and potential risks.

Deposit Insurance Protection

Federal deposit insurance protects funds held in high-yield savings accounts. The Federal Deposit Insurance Corporation (FDIC) insures deposits at banks, covering up to $250,000 per depositor, per insured bank, for each account ownership category. If an FDIC-insured bank fails, your principal and accrued interest are protected up to this limit.

For credit unions, the National Credit Union Administration (NCUA) provides similar protection through the National Credit Union Share Insurance Fund (NCUSIF). The NCUA insures deposits at federally insured credit unions, offering the same $250,000 coverage per depositor, per insured credit union, per ownership category. Both FDIC and NCUA insurance are backed by the full faith and credit of the U.S. government.

To verify insurance, financial institutions display the FDIC or NCUA logo on their websites and at branches. Individuals can also use the FDIC’s BankFind tool or the NCUA’s Credit Union Locator to confirm an institution’s insurance status. This verification step helps ensure deposits are protected against institutional failure.

Inflation and Purchasing Power

While deposit insurance protects the nominal amount in a high-yield savings account, inflation poses a risk to the real value of savings. Inflation is the general increase in prices for goods and services over time. As prices rise, the purchasing power of money decreases, meaning each dollar buys fewer goods than before.

If the interest rate earned on an HYSA is lower than the inflation rate, the real value of the money diminishes. For example, if an account earns 1% interest but inflation is 3%, the real return is a negative 2%, reducing what savings can buy.

Fluctuations in Interest Rates

The “high yield” aspect of these savings accounts is not static; interest rates are variable and can change over time. High-yield savings account rates are influenced by broader economic conditions, actions taken by the Federal Reserve, and the individual bank’s financial strategies. Changes in the federal funds rate, a benchmark set by the Federal Reserve, often lead to adjustments in the rates offered on deposit accounts.

A high-yield savings account might initially offer an attractive rate, but there is always the possibility that the rate could decrease. Banks may adjust their rates based on their need for deposits or competitive pressures within the financial industry. This variability means that the amount of interest earned on savings can fluctuate, impacting the overall return on the funds.

Operational and Security Considerations

Operational and security considerations involve risks related to managing an online account and general cybersecurity. Maintaining strong, unique passwords for online banking is an important security measure. Utilizing two-factor authentication adds another layer of protection, requiring a second verification step beyond just a password. These practices help guard against unauthorized access to accounts.

Scams like phishing, where criminals attempt to trick individuals into revealing sensitive information, pose a risk to account security. Malware and other cyberattacks can also compromise account access if devices are not adequately protected. Financial institutions have responsibilities for implementing robust security measures, but individuals also play a role in protecting their account information by being vigilant and avoiding suspicious communications. There is also a potential for human error in transactions, such as making an incorrect transfer, which can require corrective action.