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, HYSA 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.

There are pros and cons to opening a HYSA. So, before you apply to open one, let’s explore the benefits and drawbacks.

Pros of High Yield Savings Accounts

High Yield Savings Accounts (also known as High Interest Savings Accounts, or HISAs) have some attractive benefits:

High Interest Rates

This is the big obvious benefit. With a HYSA, 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 HYSA 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.

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 HYSA. It’s a great place to hold and grow your emergency funds.

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. 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

High Yield Savings Accounts are secure places to hold and grow your money, because they’re protected with federal or provincial insurance coverage. Most HISAs 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 High Yield Savings Accounts

No financial tool comes without its drawbacks. Here are some to keep in mind with HYSAs:

Minimum funds requirements

Some High Yield Savings Accounts 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. 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 HYSA 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. Always read the fine print to understand your limitations.

Lower Yield than Investing

While HYSAs 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. HYSAs are pretty stable.

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:

Interest Rate

Interest rate is the big one, right? This is why we look to HYSAs, 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 Functionality

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.

Customer Service

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

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.