What Is A High-Yield Savings Account?

Very simply, a high-yield savings account is a bank account that earns a much higher interest rate than a traditional savings or checking account.

Loosely translated: more free money for you.

Why Do Banks Pay Interest?

Banks use the money their customers’ (your) accounts to make loans to other customers, who pay interest on said loans.  After the bank pays their overhead, they pay you interest on the money in your account.  They’re paying you to allow them to use the money to make loans.

So you’re kind of like a teeny tiny bank…kind of.

They’re also using interest payments to attract customers to their product (savings and checking accounts).  They’re trying to convince you to store your money with them instead of another bank.  This gives them more money to lend, and you get paid interest.

A classic win-win situation.

Why Is This Important?

I’m so glad you asked.  

The interest you earn on your savings account is free money.  Your money is in your bank account, and the bank pays you interest.

If your money was stored under your mattress, you’d earn exactly zero interest.  Unless you have a special mattress, in which case, I’m very interested in learning about it.

If your money is going to be in a bank somewhere earning interest, why not get the most you can out of it??

What Money Should I Put In A HYSA?

Before we get farther into why let’s take a quick look at what.

A high-yield savings account is just lovely for an emergency fund and short term savings.

The real answer to that question of course is the beloved it depends.  I’ll give you my personal recommendation though, and tell you what we use our HYSA for.

“Other” Savings

“Other” savings is anything that’s not long term, like retirement and kids college.

Our kids are two and under so college is a long way away for us still.  Our permanent leave-the-work-force-forever retirement is also a few decades away.

That stuff goes into the stock market in index funds.

Examples of “other”: vacation, rental property down payment, a new (to us) car (bought with cash), etc.

The stock market is way to volatile for our liking for short term savings like that.  So we use the HYSA to earn more than nothing on it and skip the market risk.

Emergency Fund

Samesies for our emergency fund.

Hopefully, there is not an instance so pronounced that we’d have to use our emergency fund in an actual emergency.  Ideally, we’ll never have to use that money.

However, you never know.  Cough Government shutdown 2019.  Sneeze coronavirus 2020.  I’m actually a little scared for the first quarter of 2021 now.

And that’s why everyone needs an emergency fund.

I’m a huge advocate of the emergency fund, and a huge advocate that it be somewhere like an FDIC insured HYSA, not in a volatile or an ill-liquid investment.

The stock market, real estate, a business, all fall into those latter categories.  They’re great investment vehicles and if you do it right can make you a bunch of money, but they’re not good for housing your emergency fund.

Are You Leaving Money On the Table?

Ok, now that I’ve convinced you that you shouldn’t put your WTF money in a volatile or ill-liquid place, why not just keep it in your normal savings account where it is now?

You’re full of great questions today!

According to the FDIC, as of April 6th, 2020, the national average interest rate on an interest checking account is 0.05%.  A savings account will earn you a very exciting 0.07%.

That’s seven one-hundredths of a percent.  If you round that to the nearest whole percent it would be zero. Whoo-freaking-hoo.

Interest rates of a high-yield savings account will fluctuate with market situations.  It is safe to say though it will still stay significantly higher than the national average.

Also as of April 6th, 2020, there are more than just a few high-yield savings account options that offer over 1.5%.

For Example: The American Express high-yield savings account interest rate is currently 1.6% annually, compounded daily, deposited monthly:

The Math

Let’s say you have a $1000 emergency fund.

If it’s living in a traditional savings account, making 0.07% annually, after one year of monthly compounding interest, your $1000 will be $1000.70.

You will have made $0.70.

Now, that seventy cents is free money.  You did nothing then magically a year later you had an extra seventy cents.  Free is free, so there will be no complaining.

However, if we’re a little more strategic, a high-yield savings account paying you 1.6% interest would have magic-ed you $16.12.

After one year of not adding to, nor taking away from your $1000 emergency fund, you were given $16.12 of free money.

Let’s take this one step further.

What if you have a fully funded, 3-6 months worth of living expenses, emergency fund hanging out in that savings account.  Just waiting patiently for a day that needs saving.  

Let’s say your WTF just happened stash is $30,000.

If your $30k is in a traditional savings account making you that very exciting 0.07%, one year untouched will earn you $21.01.  

Still no complaining.  This is free money.  Not a landslide of free money, but more than your mattress would be paying you.

However…..

That same $30k at 1.6% equals $483.54 of interest in that same year.  That’s not nothing!

You’re not going to get rich off of interest in either situation here.  But, it’s certainly a nice little boost to your savings!  I don’t know about you, but if someone wanted to hand me an extra $480 a year, I’d happily take it.

If you leave that $30,483 in there for another year, after the second year you’ll have $30,974.  You’ve earned another $491 in year two and are now up almost $1000.

That’s the magic of compounding interest.

6 Great High-Yield Savings Accounts

If you’re looking to start raking in that free money, I’ve got six great, FDIC insured, options for you.

Rates are as of April 2020.  I have no affiliation with any of these institutions, other than being an AmEx customer only.

These are listed in no particular order.  The last two demonstrate how important it is to read the fine print.

1. Marcus by Goldman Sachs: 1.7% APY, no fees, no minimum balance
2. Barclays: 1.5% APY, no fees, no minimum balance
3. American Express Personal Savings: 1.6% APY, no fees, no minimum balance
4. Discover: 1.5% APY, no fees, no minimum balance; earn a $150 bonus with a $15,000 deposit and a $200 bonus with a $25,000 deposit (bonus valid on deposits made by 5/25/20)
5. CIT Bank: 1.7% APY, $100 minimum deposit, and up to a $300 bonus; but the bonus requires a deposit of at least $50,000 and in order to get the full 1.7% you need to deposit at least $25,000 or have at least $100 deposited each month
6. UFB Direct: 1.7% APY, no fees, no minimum balance required to open an account, but you need to maintain a $10,000 balance to earn the 1.7%; less than $10k will earn you a big fat 0%

Don’t Chase Rates

We have our emergency fund in the American Express Personal Savings account (more about our set up below).

We’ve had the account for a few years and our interest was just over 1% when we opened it (which at that point was very exciting) and up over 2% there for a bit when rates started ticking back up.

Now, you’ll see that Marcus is offering a slightly higher rate than AmEx right now.

These rates fluctuate with what’s going on in the economy.  The account you open right now may not always be the highest rate you could get.

Don’t chase rates.

Let me say that again.

Do. Not. Chase. Rates.

Pick a bank that gives you a good interest rate and matches your needs for the money you’re putting in it.

Open the account.

Fund the account.

Build your savings.

That’s it.

If you find an account that offers an extra tenth of a percent, don’t switch to that one.  Don’t switch banks and move your money every time there’s an account with a slightly higher rate.

Don’t even pay attention to where all the high-yield accounts are and what rates they’re offering.

It’s not worth your precious time or energy and it may drive you mad.

I said we’ve had our HYSA for years… I learned about these other accounts I’m telling you about here for the purposes of this article.  (I did a ton of research of course, but I obviously haven’t personally used six different savings accounts.)

I had no idea about their details or that some of them even existed before I sat down to write this.  I don’t think Marcus was even a thing when we opened ours.

When we opened the account, we researched what was available, picked the best one for us at the time, and never looked back.

The difference between 1.6% and 1.7% on $1000 is $1.01.  One dollar and one penny.  For the year.  The difference in that tenth of a percent on $30,000 is $30.50.

$30 is not nothing, but that’s over the course of an entire year.  A few dollars a month.

That also assumes that the rates of the two accounts are going to hold steady at 1.6% and 1.7% for the whole year, which they most likely will not.  That’s the real issue here.

Taking advantage of a high-yield savings account and earning a few hundred extra bucks is worth the time and effort it takes to open the account (which is not a ton of time nor effort anyway).

Trying to squeeze out a few extra bucks here and there is way more hassle than it’s worth.

What’s The Catch

There is no catch, but as an informed consumer, you do need to make sure you understand the fine print.

Minimum Balance

Some accounts require a minimum balance to either open the account or to take advantage of the high interest rate.

Depending on the size of your emergency fund and how often you have to dip into (and then replenish, of course) your savings, an account with a minimum requirement may not work for you.

Access To Your Money

These are savings accounts we’re talking about here, not checking accounts.  Savings accounts have a maximum number of withdraws per month.  I’ve noticed that six seems to be a common number, and apparently that’s because it’s the limit per federal law.

Did you just learn right now that there’s an actual law about it and the banks aren’t just trying to keep your money in their savings account?  Don’t worry, me too.

Ideally, you’re putting money into your savings account frequently and taking it out infrequently.

If you need an account that allows you to pull money out more than here or there, make sure the account you choose meets your needs.

The second piece of access is how you can get to it.

Some HYSAs can be accessed with a checkbook or debit card, but several do not have that option.  Your emergency fund is, by design, for true emergencies only.

If your emergency likely requires money within a few hours, not 1-3 business days, an online account that will require an electronic transfer to your checking account at a different banking institution may not be the best choice.

I keep coming back to the emergency fund, but if this is just a normal savings goal for you, that money is most likely needed on short notice even less.  

Accountability

The other side of that coin is that an emergency fund is not supposed to be used for a vacation or the new iPhone.

Having an extra hurdle to jump over can definitely be a really good thing.

The extra required step of transferring the money and waiting for it to clear will remove your ability to be impulsive with your savings, emergency or otherwise.

Whatever money you have in a HYSA is there on purpose, and not supposed to be spent on a whim.

One extra layer of accountability is a good thing here.

Only you can decide the right set-up for you.  But be honest with yourself and set yourself up for success, not failure.

Fees & Penalties

Some banks still have fees for things.  If the account has a minimum balance, make sure you know what will happen if your balance has to dip below the minimum for any period of time.  It may just be that your interest rate is lower.  Find out before giving them your money.

How We Do It

We personally use the American Express Personal Savings Account.  When we opened the account a few years ago, we set up the link between AmEx and our primary checking account at Navy Federal Credit Union immediately.

We didn’t need to transfer money at that point from AmEx to NFCU, but setting up the link takes a few days in addition to the actual transfer of funds.

We wanted to have the link established so if/when we did need to move money, we didn’t have to take extra time getting the banks to talk to each other.

If we need to move money from the high-yield savings account at American Express to our every day checking account at Navy Federal, it takes the typical 1-2 business days for the money to show up at NFCU.

The AmEx account doesn’t have an ATM card with it, so we have to wait a day or two to be able to access the funds.

That works for us because:

1. We have a relatively high savings rate (we spend a good deal less than we bring in every month) so there is always a bit of a “buffer” in our checking account
2. We’re confident enough in our ability to plan for or deal with the 1-2 day transfer time, should we need the money

You may not feel the same way, and that’s ok.

Do What Works For You

I share a bit of our personal set up and philosophy surrounding our HYSA so you can see an example of how this works for us.  This works for us because of how we budget, spend money, and our savings rate.

We’re comfortable with the level of access we have to our money at any given moment.

If this works for you too, that’s great.  If not, tweak it to fit your personal needs or take a different route entirely.

Personal finance is personal, people.  A good plan varies widely from one person to the next depending on risk tolerance, access, needs, the amount saved, etc.  Be sure to think about all the things when setting up your system.

It doesn’t have to be hard or scary, just make sure you’re making informed decisions and you’ll be comfortably raking in that free money.

Do you have an HYSA?  Are you going to open one?  How do you feel about your WTF is going on fund?