What’s The Deal with High Yield Savings Accounts?
What if I told you that my husband and I earn about $200 a month in passive income risk free? No affiliate links, no schemes, no catches. Just money making money. How? With our high yield savings accounts.
So what’s the deal with high yield savings accounts (HYSA)? Today we’re going to break down the who, what, where, and why of these accounts.
Who Needs One?
Literally everyone.
What Is It?
An HYSA is an online savings account that works like a typical savings account at any bank. You can make deposits and withdrawals or you can leave it alone. But a high yield savings account pays you interest on your savings at a much higher rate than your brick-and-mortar bank can.
Because online banks can operate at lower costs (no physical branch buildings, no branch employee costs, no branch overhead), they can offer customers a larger incentive to bank with them.
Currently, online HYSAs offer up to 4-5% interest APY (annual percentage yield). Many do not have minimum balance requirements or fees of any kind. Just money added to your money.
And, yes, you can access your money at any time, interest and all.
Withdrawals and transfers do take longer than with a brick-and-mortar. The waiting period is about 3-5 days on average if you’re transferring to an external account (like to your checking account with a physical bank); it’s usually only 1 day if it’s from, say, one Capital One account to another Capital One account (an internal transfer).
With an HYSA it’s not possible to go to a branch location, withdraw from your HYSA, and walk out with cash in hand. However at a physical bank, savings interest averages less than 0.47%. So for a $10,000 balance, we’re talking about $500 vs. $47 in interest for the year.
Where Can I Get One?
I personally have a few of these accounts with different banks. I opted to diversify a bit so I could test out different banking experiences to report out to my readers with recommendations.
Our Emergency fund is in an HYSA with SoFi (4.6% APY) and my 4 other accounts (the Big Dream fund, Repair fund, Vacation fund, and Christmas fund) are with Capital One 360 Performance Saving (4.35%). My kids’ custodial savings accounts are also all with Capital One.
Even though the interest rate is a bit lower, Capital One is my favorite for my situation because there are no minimum balance requirements, no withdrawal limits, no fees, and no deposit requirements. No strings, that’s my jam.
But there are many options to choose from nowadays. A source I trust for comparison research on HYSAs is www.nerdwallet.com. (Not sponsored, just genuine love for this source.)
So Why Does EVERYONE Need an HYSA?
Everyone should have an emergency fund in some capacity. Whether you’re just starting out your personal finance improvement journey or you’re an established investor with $1M net worth, you should have some money set aside for the unexpected no matter what.
Now I’m not talking about “oh these shoes are on sale today” unexpected - more like “our HVAC unit broke” or “I lost my job today” unexpected. The break-glass-in-case-of-emergency kind of unexpected.
And an HYSA is the ideal place to keep an Emergency Fund. Why?
An HYSA is relatively liquid - meaning you can access the cash in just a few days without having to sell anything or pay any penalties.
It’s a separate account from your checking/spending account - keeping this money separate is critical to effectively managing your finances.
Your money earns money, risk free - this type of interest-yielding account can yield up to 5.15% as of today’s publication. And as long as your money is there, that interest compounds. With saving, we love compound interest!
Waiting period for withdrawals - when used for an emergency fund, the waiting period is not a bug it’s a feature! Because there can be a couple days between fund transfer and availability, this waiting period can give you some time to evaluate its use. It’s juuuuust inconvenient enough that you’ll be more likely to only withdraw for a good reason.
Easy to open and manage on the go - It takes mere minutes to create an account online and apps make adding, monitoring, and moving money very simple. No calls, no bank lines, just some tappity-taps and done.
Your money is protected. These types of accounts are FDIC insured, just like a typical savings account.
So what are the downsides and catches?
As with everything in life, there some catches, so read your fine print, folks. In the meantime, I’ll share my experiences.
I mentioned this, but I’ll put a finer point on it. Withdrawing money from an HYSA is less convenient and takes more time than from a physical bank branch. For this reason, an HYSA is not a good option for your spending account. Only for money you don’t plan to withdraw from often, like your emergency fund.
Some accounts have minimum balances, minimum deposits, or limited withdrawals. My choices do not (main reasons that I chose them), but do your research and find what best fits your situation.
Some accounts require direct deposit in order to take advantage of a higher rate. My SoFi account, for example, offers 4.6% with direct deposit from my paycheck. Without direct deposit, the account only yields 1.2%.
Fortunately there’s no minimum deposit to get the higher rate, so I only split $100 from each check into this account rather than my whole check. But if you don’t have access to direct deposit through your employer or if your employer cannot split your payment to different accounts this is a big catch.
The interest rates change over time so you likely won’t earn 5% interest every month forever and ever amen. When I opened my first HYSA 14 years ago (with ING who was later acquired by Capital One), the interest rate was about 1.1% annually. Rates have climbed tremendously, especially in the last 3 years.
Nerd Alert: HYSA rates are tied to the Federal Reserve. As the fed rates rise or fall over time, HYSA interest rates will change in parallel. This is NOT like having your money in the stock market where the entire balance will rise and fall over time. This fluctuation only affects the percentage you earn. Your money stays where it is.
So that’s how we earn about $200 a month risk-free, just by saving. And we apply that earning to each savings account, helping them all grow even faster.
Share your favorite HYSA banks in the comments!
Do you have more questions about HYSAs? Contact me for a 1:1, and I’ll be happy to help!