Making Money Moves

Erasing Misconceptions of the High Yield Savings Account

There are savings accounts… and there are HIGH YIELD SAVINGS accounts, ya feel? A high yield savings account (or HYSA for short) is a must-have for literally everyone. Read on to learn what is a high yield savings account, their interest rates, why rates go down, how it stacks up to investing, and how to pick and open a high yield savings account.

What is a High Yield Savings Account?

If you’re familiar with savings accounts, then you’re also familiar with high yield savings accounts - you just didn’t know it yet. 

(In case you’re not familiar with savings accounts, these are accounts in which you deposit some amount of money with a financial institution in exchange for a small percentage of the interest.)

A high yield savings account is almost exactly like a regular savings account, with one major exception:

The interest rate is significantly higher than a regular savings account. We’re talking 10-25x higher.

That’s it.

We all have savings accounts unless you’re hiding your money under the bed à la the 1940s. Instead of having a regular savings account, you want to consider keeping your savings in a high yield savings account. This 10-25x higher interest rate can have AMAZING returns over time, especially if you continuously add in a little bit of money each month.

What are the Benefits of High Yield Savings Accounts?

The high yield savings account interest is what makes it so worthwhile and beneficial to have one. Instead of earning mere pennies from banks (or nothing at all with some scumbags) who are TAKING YOUR MONEY AND USING IT FO’ FREE, you could be earning real $$$. 

When you deposit money into a savings account, it’s not just sitting there in a lockbox or safe. Banks are taking this money and loaning it out to people and charging interest. Or they’re investing it and making more money off of it.

If they are going to take YOUR hard earned money and make more money off of it, the least they can do is give you a little payment.

Let’s take an example. Say you have $1000 in your regular ol’ savings account. This bank of yours gives out 0.05%. Now let’s say you put that $1000 into a high yield savings account with a rate of 0.50%. In 12 months, you’d have like… an extra 50 cents. Put that same money into a high-yield savings account and you have $5. Now that doesn’t seem like much, but if you’re saving regularly, this can really add up. Imagine you had $10,000 in the account; you’d have an extra $50. Or if you had $100,000. You’d have an extra $500.

You can use the money in your high yield savings account for a variety of reasons. Whether you have short-term financial goals or long-term horizons, a high yield savings account can give you a little extra cashiola to do things like:

  • Creating a f$ck-it fund
  • Planning for an epic trip or sabbatical
  • Taking time off to write a book or explore another passion
  • Starting a side hustle

Do High Yield Savings Account Rates Change?

Yes, they do. Banks may (or at least they should) notify you if their rates change - but don't count on it. You may have opened an account with a certain rate, only to realize that the high yield savings account rate changed to something lower.

Why Are High Yield Savings Accounts Going Down in Interest Rates?

The biggest reason is the Fed.

When you deposit your money to a bank, that bank - along with all the other banks in America - deposits the money to the Fed. Think of the Fed as the Bank of All Banks. Just like how banks give you a little interest for keeping your money with them, the Fed gives banks some interest for keeping the money with the Fed. In turn, some not-so-scummy banks give you a portion of the money in the form of a higher interest rate in a high yield savings account.

When the Fed has higher interest rates, it typically means higher interest rates from high yield savings accounts. When the Fed lowers interest rates, these banks pass the buck on to us in the form of lower high yield savings account interest rates.

The Fed will often lower interest rates when there is an economic downturn. They do this because they want to stimulate the economy by having people take out loans, buy homes, or generally borrow stuff. It gets more money into the economy. But that impacts those of us saving because that lower interest rate comes back in the form of lower HYSA interest rates, too.

If the economy is booming, you can expect high yield savings account interest rates to be higher. If there is economic uncertainty or say - you know - a GLOBAL PANDEMIC, you can expect high yield savings account interest rates to be lower. As of this time, the highest APY rates we’ve seen are 0.55-0.61%. You’d be hard pressed to find anything higher than that at this time. 

That isn’t to say that rates may not go back up in the future. As the economy shifts and changes, banks may offer higher rates, especially if the Fed increases interest rates. And who can forget good ol’ competition. A new bank kid may show up on the block and offer a higher rate to entice you to open a high yield savings account with them. Keep in mind that they may lower this rate in the future once they’ve got enough users and hope that you’re too lazy to move away.

What Should I Care About When Looking for a High Yield Savings Account?

1. Cost of the Account

Some banks are really lame and charge YOU money for having a regular savings account with them despite not paying you much interest, if any. A HYSA can offset the cost of the account. Even better ones charge you NOTHING to have an account, although some may have a minimum balance (this can range from literally one penny to $100). We recommend sticking to those institutions that offer HYSAs for free.

2. Interest Rate or “APY”

When opening an account, it’s crucial to check the high yield savings account interest rate. Interest rates can vary from provider to provider. It can also vary based on what’s happening in the world, the Fed, and in the markets. 

You may also see the term “APY” listed instead of “interest rate” for high yield savings accounts. These two words are NOT the same thing. We’ll cover this more in another article but here’s what you need to know:

The interest rate is how much you get. The APY (annual percentage yield) is the interest rate + the effects of compounding over a year. So if you added money into a HYSA and it gains some amount of interest each month, you’re not only getting that interest rate, you’re also getting the effects of compounding over that year. All this means is that you get a little bit more money. F$ck yeah.

3. Limits on Withdrawals

We haven’t had any issues with this but there may be the occasional bank that limits how many withdrawals you can have on a high yield savings account. This isn’t common practice so just skip any bank that limits you like that.

How To Open High Yield Savings Accounts

Do not fret! Banks these days have made it wayyyyy too easy to open an account with them. We love comparison charts like this one at NerdWallet (and we’ve reviewed it ourselves and agree) that list out some of the best high yield savings accounts along with their APY and minimum deposit amounts. We mentioned this above but y’all puhleeze do you due diligence and check the following:

  • Interest rate and APY 
  • Any minimum deposit amounts (without this you won’t qualify for the 
  • Fees to open or maintain the account
  • Limits on withdrawals
  • How you can withdraw the money (do they have ATMs or is it all debit cards and wire transfers?)

Some banks do not have an actual storefront to visit. They are exclusively high yield savings accounts online. What’s cool about this is you can do everything on your phone or your compy. But you want to check if they’re known for their customer service because if something goes wrong, you’re dealing with the high yield savings account online exclusively instead of being able to go in person to a brick and mortar type deal.

High Yield Savings Account vs Investing

You’re probably wondering… 

“Why not put all my money into an HYSA with these interest rates instead of investing?”

Or maybe you’re thinking the opposite like…

“Why should I bother having an HYSA when I can invest in the market and get average returns of ~7% a year?”

Ah. We’re so glad you asked. It can be tempting to not invest because investing is seen as being risky. And if you do things like follow hot tips, or buy stocks without doing research, or invest the majority of your money in high-risk, volatile assets like cryptocurrencies - yes, then investing is risky. 

But if you make sound investment decisions such as low-cost index funds, having a 401k and IRA, diversifying your portfolio, and doing careful research, then investing is a risk that most people can handle - and greatly benefit from. Having all your money tied up in savings, even high yield savings accounts, can be extremely detrimental to your wealth creation in the long run since the interest rate and effects of compounding are not as great as you get from investing (safely) in the market.

Now, as for those of you who want to put ALL your money into investments, we want to offer a word of caution. Having some amount of money set aside in savings, especially a high yield savings account can be incredibly useful when you need quick, reliable access to cash. For short-term goals like a f$ck-it fund, saving for a trip, an emergency fund, or a shorter-term goal, a high yield savings account not only gives you the power of compounding interest, it can also give you reliable cash on hand instead of dipping into your long-term wealth creation and investments. It’s all about balance.

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