As I mentioned in my recent New Year’s post 2023 in Review: My 3 Major Financial Moves, last year I opened my very first High Yield Savings Account (HYSA). I said it before and I’ll say it again: I cannot believe how long it took me to make this financial move.
I had been in the HYSA market for a while, but either had trouble finding one at all or was underwhelmed by the interest rates I found. I figured it was better to put my money into my tax-advantaged retirement accounts (IRA and TSP) and my individual brokerage account since a HYSA was (apparently) illusive.
Then sometime around summer 2023, my friend and fellow financial independence enthusiast, told me about a HYSA her financial advisor had just found for her: First Foundation Bank.
Now, let me be clear, this is not an endorsement for this bank, merely transparency about the banks and account types I’m currently doing business with—and if anything changes, I’ll let you.
First Foundation Bank offered a HYSA with 4.8% APY (annual percentage yield), or interest rate, at the time, compounded daily, with no bank fees, a low minimum vesting period (90 days I think) and was FDIC insured. Yes. Yes. Yes. Finally! I opened an account immediately. Since then, my interest rate has grown to 5%.
But Ashley, that’s considerably less than the long-term 9% interest rate return from the S&P 500, you may ask.
Astute observation dear reader. Let me explain.
What is a HYSA (High Yield Savings Account)?
HYSAs are exactly as it sounds, a savings account with a high interest yield. “High Yield” circa 2024 means up to approximately 4-5% APY—which is pretty remarkable. “Savings account” meaning it should be easy to make withdraws when needed, and it’s FDIC insured.
HYSAs play a unique function in your financial portfolio. Unlike investment accounts where your money is designed to be tied up for years and (ideally) decades, HYSAs are designed for short to medium-term saving. For me, I’m saving up for a new (used) car, perhaps a cash infusion into the stock market in the event of a post-pandemic market crash (which I’m still waiting for), or a down payment on a new investment property. We’ll see.
While the account is funded by post-tax dollars, you’re still subject to taxes on any earned interest upon withdrawal. If you want tax-advantaged account–those will be your retirement accounts and 529 education accounts.
In any case, HYSAs are an excellent way to earn some inflation-mitigating interest while you’re saving for something—or in case of emergency. Here are the most notable advantages to HYSAs over long-term investment accounts and regular savings accounts.
1. Easy Access
One of the most appealing aspects of the HYSAs is the easy access. Unlike your traditional investment accounts, HYSAs are, of course, savings accounts, meaning they’re liquid and FDIC insured–more on the FDIC insurance later. You can safely save (and earn modest interest) while you’re building up toward a purchase. You can withdrawn the money whenever you want, without a care whether the stock market is up or down.
Some HYSAs may have a vesting period—an amount of time you cannot make withdrawals. So, double check for a vesting period and make sure it’s a modest amount of time (days to months). If you’re money will be tied up for 3-6 months or more, then perhaps you should consider a Treasury Bond instead. The advantage of the HYSA is, after all, easy access, any time.
2. High Contemporary Returns (>4%)
While the “high” in HYSA can be a little subjective and subject to the federal fund rate, or “Fed rate,” it’s certainly not right now. Considering these are savings account, not investment accounts, contemporary rates are pretty phenomenal at 4-5%. Now is a great opportunity to take advantage of such favorable rates while you’re saving up for your next major purchase or investment.
Many HYSAs on the market today also offer interest compounded daily. This means, every day you’re earning interest on not only your deposit, but also the interest you earned the day prior, and the day prior to that, and the day prior to that.
It should be noted though, that banks can set and reset their HYSA interest rates at any time—especially when the Fed rate changes. As long as you semi-regularly follow national financial news—and/or sign up for email notifications—you probably won’t be surprised if your interest rate changes significantly.
All this to say, this is not really a save-and-forget kind of account. You should regularly (i.e. monthly or quarterly) log in to monitor your account and interest rate. Remember, it’s easy to move money in and out of this account, so don’t be afraid to take your money elsewhere if you find a better opportunity.
3. Short-term Incentive to Save
If you’re like me and money-motivated–I mean how can you not be in an uncertain capitalist economy?—here is your natural incentive to save! In HYSAs, every month, any earned interest is deposited into your savings account! That means, every month, you’ll be rewarded for your savings and that reward is directly correlated to how much you’ve saved!
If you have a HYSA compounded daily, at 5% APY, then a $1000 deposit can earn you $51.27 after one year. If you contribute another $250 every month, you’ll earn $121.12 after one year. While these may seem like modest returns–and they are–the real benefit is you’re earning money while you save for near-term purchases and/or major expenses.
The more you save, the more you’re rewarded! While HYSAs are, of course, not designed to replace your investment accounts, they are an excellent compliment, showing you show-term, modest gains while you patiently wait for your other, long-term investment accounts to grow.
4. Inflation Mitigation
Money in your traditional savings account will, on average, offer a 0.46% APY according to the FDIC’s 2023 National Rates and Rate Caps. However, inflation rates–the gradual increase in goods and services over time–vastly outpace this at a long-term average of somewhere around 3% every year. As we all know, it’s been much, much worse since the 2020 COVID Pandemic.
At any rate (literally), inflation means, the value, or spending power, of each dollar sitting in your traditional savings account will actually decrease every year. This means you must invest your money even if you want it to keep it’s value, let alone grow. Financially literate people know this and so do you!
HYSA are an excellent way to mitigate inflation in the near-term. HYSAs carry much lower risk than the stock market because, again, they’re savings accounts, not investment accounts.
Many banks do not charge bank fees for the HYSAs. So, while you’re shopping around, pay attention to whether or now a potential HYSA charges a fee. If it does, it may be worth it to keep looking. While >4% is a great return for a savings account, any fees can easily start cutting into that return, especially once factoring for inflation.
More importantly, that bank is making a boat load off your deposits. Once they have your cash on their books, the bank can immediately loan it to another customer and collect interest—upwards of 6-9% or more depending on the type of loan. So, don’t let them nickel and dime you for this privilege. The bank should be paying you (i.e. in the form of a fabulous interest rate!).
5. FDIC Insurance Protection
Since HYSAs are savings accounts, they’re basically just another bank account. After an ideally short vesting period, you should be able to move money in and out easily with no additional fees. Like most bank accounts, they should be FDIC insured! If it’s not FDIC insured, keep looking!
The FDIC is the Federal Deposit Insurance Corporation. The FDIC is tasked with providing insurance to banks to protect their customers’ deposit accounts against a bank collapse and therefore reinforce public confidence in the U.S. banking system. Specifically, the FDIC insures deposits “to at least $250,000 per depositor, per ownership category at each FDIC-insured bank.”
According to their website, “Since the FDIC was founded in 1933, No depositor has lost a penny of FDIC-insured funds.” You’ll note 1933 was in the midst of the Great Depression, caused by the stock market crash of 1929 and then bank runs, resulting in the failure of several banks simultaneously. Many Americans lost not only their investments, but their savings as well.
Shortly thereafter, President Franklin D. Roosevelt signed the Banking Act of 1933, which established the FDIC—a provision which was very controversial at the time.
Note that “deposit accounts” do not include “investment accounts.” IRAs, 401Ks, individual brokerage accounts, and the like are not FDIC insured. Only open a HYSA that’s FDIC insured.
Conclusion
HYSAs are an excellent tool to build an emergency fund or save for a short to medium-term investment or expense. Every month, reliably, you’ll be rewarded for your saving efforts. The most notable reasons to open a HYSA today are:
- Easy Access: As savings accounts, rather than investments accounts, HYSAs allow you to deposit and withdraw money with ease and no fees.
- High Contemporary Returns (>4%): HYSAs are currently offering fantastic interest rates, many over 4%!
- Short-term Incentive to Save: HYSAs usually deposit your interest rate returns monthly, providing you a little, immediate reward proportional to your savings efforts.
- Inflation Mitigation: A high interest rate return allows you to hedge against inflation as you’re saving for a larger purchase or expense.
- FDIC Insurance Protection: As deposit accounts, HYSAs are FDIC insured to give you piece of mind.
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