Can You Lose Money in a High-Yield Savings Account?

High-yield savings accounts are one of the safest places to store your money. On top of that, they also produce higher than average returns when compared to traditional savings accounts.

However, you might be wondering if it’s still possible to lose money in a high-yield savings account. Today we will answer that question, and deep dive into other related questions and topics about high-yield savings accounts, such as why saving money isn’t always the smart move.

Let’s get started.

Can you lose money in a high-yield savings account?

The answer is no. You cannot lose your money in a high-yield savings account. This is because a high-yield savings account is not a type of investment, but instead a type of savings account. 

Most often, when you see banks offering savings accounts, they are referring to a traditional savings account.  These accounts provide your money with a safe place to sit and give you a small amount of interest.

A high-yield savings account is no different. You can find them at many banks, and they provide your money the same safety as a traditional savings account. However, the big difference is that high-yield savings accounts have significantly better interest, as much as 20x or more than the national average.

Like traditional savings accounts, high-yield savings accounts are FDIC insured up to $250,000, easy to open, low risk, and typically have no or small minimum deposit requirements. The money in your high-yield savings account is also available whenever you need it, which makes them great for emergency funds.

How can you lose money in a high-yield savings account?

As we’ve already made clear, it’s highly unlikely for you to lose money in a high-yield savings account. However, for the sake of argument, let’s look at some possible ways you could lose your money.

There are only two possible scenarios that could ever occur, which would cause you to lose money in a high-yield savings account:

• 1st scenario: You deposit $300,000 into an FDIC savings account. The bank which is holding your cash suddenly goes bankrupt. The FDIC can only give you back $250,000 since that’s the maximum amount of money they can insure. This means you’ll be out $50,000.
• 2nd scenario: The United States Federal government collapses, the economy collapses, and all the central banks collapse. The odds of this happened are zero-to-none. But in a hypothetical situation, you would certainly be out of your deposited money.

Outside of these two far-fetched scenarios, your deposit in a high-yield savings account is 100% guaranteed and backed by the full faith and credit of the United States government.

High-yield savings accounts offer zero risks

Because high-yield savings accounts are essentially boosted versions of traditional savings accounts, they offer zero risks. This can be both a good and bad thing, depending on your financial goals and personal objectives.

Let’s take a look at both the pros and cons of high-yield savings accounts.

Pros of high-yield savings accounts having zero risk

The first pro of a high-yield savings account being risk-free is that your money is secure. Unlike the money in your brokerage account, the money in your savings account is backed by the FDIC up to $250,000. Since the FDIC’s inception in 1933, not a single person has ever lost even a penny in FDIC-insured deposits.

With a high-yield savings account, you can relax knowing that your money is safe and won’t be influenced by exterior forces such as the stock or housing markets. Regardless of what is happening in the economy, your money is not going anywhere.

The second benefit of a high-yield savings account having zero risks is that you can use them for near-term money, such as an emergency fund or for a down payment on a home.

The last thing you want to do is have your emergency fund invested in the stock market. Not only are you exposing your savings to market fluctuations, but the money isn’t readily available if you need it on short notice.

On the contrary, if your money is in a high-yield savings account, you have access to it 24/7 and can make withdrawals without paying any penalties or fees.

Cons of high-yield savings accounts having zero risk

The biggest con of high-yield savings accounts having zero risks is that your money won’t grow. Like with anything in the investment world, risk is directly correlated to return.

In other words, the more risky an investment, the higher the potential return. The safer an investment, the lower the possible return. For example, a high-yield savings account is the safest place to store your money. Therefore, you won’t earn much in terms of interest.

On the other hand, the stock market is a risky place to invest your money. But, with that risk comes high wealth-building returns.

It should go without saying, but putting money into a high-yield savings account is not investing; it’s saving. You invest your money in an attempt to grow it. And you save your money to preserve it for short periods.

Another con to high-yield savings accounts is that your money is subject to inflation. Inflation tends to waver between 2% and 3% each year. This means the value of your dollar is decreasing by 2% or 3% every year.

This wouldn’t be a problem if you were investing your money in a high-return stock ETF or even a REIT, but high-yield savings accounts don’t have high enough APY to curb inflation completely.

Put more simply, high-yield savings accounts don’t give you good enough returns to protect your savings from losing value due to inflation.

So what does this mean? It means you should only use a savings account for emergency funds or money you’ll need in less than one to three years. Anything else should be invested in stocks, bonds, ETFs, and other assets that will build your wealth. This brings us right into the next point.

High-yield savings accounts do not make you money

Although you cannot lose money in a high-yield savings account, you also cannot make money. So in a way, if you’re money is sitting in your account for years, you technically are losing money due to inflation. It’s a catch 22.

Let me give you a real-life example. I know someone who’s had $10,000 in a traditional savings account for almost a decade now. They are saving that money for retirement. But what they don’t know is that their $10,000 savings have actually lost about $2,011.80 in value over the last ten years.

How? Because $10,000 a decade ago had the same buying power as $12,011.80 today. So that $10,000 sitting in their savings has essentially been evaporating for years. This is why you need to be very clear about your purpose for saving. You want to avoid saving for too long unless it’s for an emergency fund.

Here are some questions to help give you an idea of why you might use a high-yield savings account to save:

• Are you saving to make a big purchase, such as a down payment on a home or a new car?
• Are you saving to buy gifts for the holidays this year?
• Are you saving to help your kid with college in 2–3 years?
• Are you saving to create a rainy day fund for emergencies?
• Are you saving because your pet is getting older, and you’re preparing for trips to the vet?
• Are you saying to take your family on a big vacation next year?

These are just a few of the valid reasons why you should save your money. Notice that most of these examples have short timeframes. In other words, the only time you should be using a savings account is for short-term purchases, big or small.

The only exception to this rule is an emergency fund. You should have an emergency fund that can hold you over for at least six months if you were to lose a job, get injured, or run into another problem. Any other money that you have should be invested.

When to invest vs. when to save your money

As a general rule, you should save your money if you plan on making a purchase within the next one to three years. For example, if you want to buy a house in two years, saving your money in a high-yield savings account is the right move.

In contrast, if you want to buy a house in four years, you’ll want to instead put your money into a brokerage account where you can invest and grow it.

Investing always makes sense if you have a longer time horizon before you need to use your money. Knowing your time horizon is important because it helps you make educated investment decisions.

Conclusion

Although you can’t lose money in a high-yield savings account, you also can’t make money. Depending on your financial goals and personal objectives, you’ll need to decide if putting your money into a high-yield savings account is right for you.

If you’re saving for retirement, which is another thirty years away, investing would be the right move for you, not a high-yield savings account. If you’re saving for a family vacation next year, a high-yield savings account would be right for you, not investing.

Understanding this difference will help you navigate the tricky roads of finance, and you’ll ultimately come out more prepared.