What is a High-Yield Savings Account (and Why You Need One)
I haven't always been good at saving. I have always kept a savings account in my usual bank, but it is true that I did not put much money into it.I always said I...

What is a high yield savings account (and why you need it)

I haven't always been good at saving. I have always kept a savings account in my usual bank, but it is true that I did not put much money into it.

I always said I would transfer any money I had left at the end of each month. But every time the end of the month came, there was nothing left.

When I finally decided to get my finances back on track, one of the first things I did was build a small emergency fund.

But then the problem was, I had a large amount of money in the bank, earning almost nothing in interest. So I finally managed to open a high yield savings account which means my money earns me even more.

What is a high yield savings account (and why you need it)

What is a high yield savings account?

A High Yield Savings Account (HYSA) is like any other type of savings account except that it pays a much higher return.

Your regular bank savings account pays you interest every month. But in most cases, it's a few cents a month. Not really something to get excited about. But the rates for high yield savings accounts can be much higher.

Consider this: the rate on a typical savings account is around 0.05%. The rate for a high yield savings account is usually at least 0.50%. And when interest rates are higher, they can be 2.0% or more. So the rate of a high yield savings account is 20x to 40x the rate of a traditional savings account.

How do high yield savings accounts work?

High yield savings accounts use compound interest, which means you earn interest every month and then that money gets added to your principal.

Your interest rate is called your APY (Annual Percentage Return). But most of these accounts pay monthly.

Imagine having your emergency fund of $ 10,000 in your savings account with an interest rate of 1.0%.

The first month, you will earn $ 8.30 in interest. The next month, you will earn interest on the full $ 10,008.30. It doesn't seem to make a big difference, and it certainly isn't enough to get rich. But after a year, you would earn around $ 100.46 in interest.

And when the interest rates are higher and your savings account has a return of 2.0% or more, you would have won $ 201.84 the first year.

Why use a high yield savings account?

A high yield savings account is not an investment. If you are looking for an investment opportunity to increase your wealth, a savings account is no substitute for a brokerage account.

It's also not the best place for the money you think you'll need soon. It may take a few days to transfer money from your high yield savings account to your checking account. For the money you use regularly, it might be better to keep it in a savings account with your usual bank or in your checking account.

Here are some great uses for your high yield savings account:

  • Your emergency fund. It is my favorite. It's just a big amount of money in the bank without being touched. By putting it in a high yield savings account, I can earn some money on it every month. And here's a tip for you: Every month, when my emergency fund earns interest, I spend that money on one of my other financial goals.
  • Financial objectives within 3 to 5 years. The stock market can be a great way to save for financial goals, but no short-term financial goals. The market can be volatile, and the last thing you want is to have your brokerage account nosedive right before you consider using that down payment. Therefore, use a savings account for goals within 3 to 5 years. Brandon and I want to buy a house in the next few years, so we're using our Ally savings account to save.

Is my money safe in a high yield savings account?

As I mentioned earlier, a high yield savings account is not an investment account. And it does not carry the same risks as investing.

As long as the bank you choose is federally insured (it should state if it is on the website), your money is FDIC insured for up to $ 250,000 per person on all of your accounts.

What to look for in a high yield savings account

Interest rate

One of the main factors to consider when choosing the right savings account should be the interest rate. After all, that's the whole point, right?

The interest rate you can get varies from bank to bank. Right now (November 2020), the bonds are between 0.50% and 1.0%.

Keep in mind that they can change. When I opened my Ally account the interest rate was 2.0%. Right now it's 0.60%.

When the Fed cuts interest rates, rates fall across the board, including high yield savings accounts. When interest rates rise again, you can bet that the rates on those savings accounts will rise as well.

And if you sign up for an account and the rate suddenly drops, don't panic. If one bank lowers its rate, chances are the others will too.

Additional features

Before signing up for a high yield savings account, find out about special features offered by the bank. For example, Ally Bank offers a bucket feature. You can create individual compartments in your savings account for different things you are saving for. I have a bucket for my emergency fund and one for my future down payment.

Access your money

Obviously, you want to be able to get your money back when you need it. And I've seen a lot of people who prefer to keep their money in a savings account at the same bank as their checking account so they can make instant transfers.

While I agree that you should make sure that you can easily transfer money from your savings account, I actually like the idea of ​​having it in another bank.

I am using my high yield savings account for my emergency fund. If I need to transfer money, it takes 2-4 days to access my checking account. This means I can't spend this money on impulse. But 2-4 days is still short enough that if I lose my income and have to live off my emergency fund, I keep it in my checking account on time.


Every time you sign up for a financial product, you need to know what fees are associated with it. None of the best high yield savings accounts I've seen have fees. So if the one you're looking at does, run the other way around.

What is the best high yield savings account?

There are so many high yield savings accounts to choose from, and there really isn't one that is better than all the others. It's about finding the one that makes you feel good.

My favorite savings account is Ally (<< this is not an affiliate link, I really love their product). I love the functionality of the buckets. I can visually break my financial goals without having to open multiple savings accounts.

I also use a Capital One high yield savings account for my business - this is where I keep my tax money until it's time to send it to the IRS.

Some other popular options are:

  • Marcus by Goldman Sachs
  • Citibank
  • Carillon

Final thoughts

A high yield savings account is a great way to earn a little extra cash on the money you would put in savings anyway. It's the perfect place to store your emergency fund or the money you save for a big financial goal.

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