High Yield Savings Accounts (HYSA)

Did you know that you could be earning 15% to 20% more with your money that you are saving?

I’m talking about a high yield savings account (HYSA) vs. a traditional savings account. Most people hold their savings account at the same place as their checking account, which allows for simple, quick and easy transfers between the two. In fact, that is what I had been doing for awhile. I had both my checking and savings at my local community bank. However, in this era of the internet, and the accessibility of opening online accounts, savings accounts have become very competitive, thus we have seen the rise of HYSA’s.

The national average rate of a savings account is 0.41 APY. Today (July 2023), you can open a HYSA online with a rate of 4.00+ APY. What do these numbers mean?

Here’s an example:

-If you opened a traditional savings account with $1,000 at the end of the first year, you would make $4.2 in interest from the bank ($1,000 x 0.42%).
– If you opened a HYSA with that $1,000 at the end of the first year, you would make $40 in interest. These example are assuming that interest is paid once yearly.

That’s 10x more with the HYSA! Before you go running off to open an account, make sure you completely educate yourself!

What is APY?
APY = Annual Percentage Yield. In the simplest terms, this is the rate of return that you will see on your money in 1 year. This number accounts for compounding. Compounding means that you are earning interest on the interest you have already collected. The other method of earning interest is simple interest. This means that you are only every collecting interest on the initial amount that you contributed and you never earn interest on interest. Let me show you another example:

COMPOUNDING– If you invest $1,000 and earn compounding interest of 2.00% you will have $1,020 at the end of year 1. At the end of year 2 you will make another 2.00% on $1,020.

SIMPLE– If you invest $1,000 and earn compounding interest of 2.00% you will have $1,020 at the end of year 1. At the end of year 2 you will make another 2.00% on ONLY your initial contribution of $1,000.

This example is small, but imaging the difference in the two methods with larger amounts of money, and larger interest rate returns.

How do I find a HYSA?

It is possible that your current bank has a HYSA option, log online to your account or give your bank a call to ask. If your bank does not have this option, it is very easy to open a HYSA online.

A few examples include:
Capital One: Capital One 360 Performance Savings™
Ally: Online Savings Account

How can HYSA offer high interest Rates?

Because HYSA are online bank accounts, these institutions do not have to pay for branches & related expenses, allowing them to offer higher interest savings.

How to find the best HYSA?

There are a lot of banks out there offering HYSA’s, how do you determine which is the best?
1. Research which accounts are offering the highest APYs (interest rates).
2. Find out what the required initial deposit is. Look for an account that is $0
3. Find out what the minimum balance requirement is. Look for an account that is $0
4. Find out if there are any fees involved with the account. Look for an account that has $0 annual fees
5. Determine which bank is most convenient for you. Do you already have a credit card or other account with one of these institutions? If so, maybe you’d like to keep everything in one place.. so go with the HYSA at that bank if it also meets the above criteria.

What information is needed to start a HYSA?

If you are opening a HYSA at a bank that you already use, the process will be swift with little additional information needed.

If you are opening a HYSA with an online bank that you have not used before, you will want to set aside about 10 minutes, to complete the application process. You should have personal information like name, e-mail, address, Social Security number and your drivers license handy. Most all HYSA applications are approved immediately after the application.

Are HYSA taxed?

The “catch” to earning these high rates, is that the interest you accumulate throughout the year, is taxable income. To be clear you are never taxed on your contributions, only the interest you earn. At the end of the year, your HYSA institution will send you the necessary tax documents, stating what interest you earned throughout the year, that becomes taxable income. In many cases, the high interest earned in these accounts outweighs the tax that is owed, so don’t let this deter you from opening a HYSA account. For a better description of this taxing process on HYSA check out this article in Business Insider

How do I begin contributing to a HYSA?

Once you have opened your HYSA, you can connect the savings account to other bank accounts. You will need to know your account number and routing number of the bank that you’d like to connect to. Once you have a checking account connected, you can make transfers directly to the HYSA. You can also set up auto-contributions, and customize how much and how often you’d like to have money automatically transfer out of a checking and into your HYSA.

How much do I need to open a HYSA?

Each bank will have different requirements regarding an initial deposit. I would encourage you to find a HYSA that requires $0 initial deposit! No excuses that you can’t get started today!

Does the APY change?

The fine print on these accounts does state that the rate can change at any point in time. Keep in mind that even a downward change of the interest rate will not have a significant impact on your money, and you’ll most likely still be earning more than in a standard savings account. The interest rate will never go negative, you will never lose money.

Are HYSA’s FDIC insured?

Your HYSA will be FDIC insured, if you open it with a bank that is FDIC insured. Make sure to read the fine print when opening the HYSA. More on FDIC insurance here.

How to use a HYSA?

So what exactly should you be using your HYSA for? To save for retirement? To save for your next vacation? To save for your weekly grocery bill?

Your HYSA is a short-term savings vehicle, so you should definitely NOT be thinking of it as a way to “invest” for something long term like retirement. On the flip side, it is also not an account that you will be withdrawing from on a regular basis, so I’d recommend NOT using it as a place to pay for weekly or even monthly bills.

Here’s what you should be using your HYSA account for- a savings location for your emergency savings fund (more on that in my post here). You can also use your HYSA for short-term to mid-term savings goals. For example, a wedding fund, a house downpayment fund, a travel fund, a new car fund.

What other things should I know before opening a HYSA?

Before you open your HYSA make sure you’ve done your research and read the fine print:

-Make sure you are aware of any initial required deposits, minimum balance required, and any yearly fees

-There is a limit of 6 withdrawals/ debits to your HYSA per statement cycle (typically per month). This is a regulation of the Federal Reserve. Find more information on this here

-HYSA are online only accounts. You do not receive any type of card or ATM withdraw privileges with a HYSA. As eluded to a HYSA account is not meant to be transactional account for everyday spending.

How I am currently using my HYSA!

As I mentioned, I currently opened my own HYSA. I opened the 360 Performance Savings with Capital One. Out of all the accounts out there, I chose this one because I currently also have another personal account with Capital One, so it was easy for me to access, and keep track of.

Instead of connecting my local community bank checking account, to my HYSA (to make automatic transactions), I actually went into my direct deposit settings for my employer and set up a direct deposit for a portion of each paycheck to deposit into my HYSA. Now, every time I get paid (bi-monthly), $____ gets deposited directly into my HYSA at Capital One, and the remaining balance of my paycheck gets deposited into my checking account. Now that I have this set up, I don’t have to make any manual transfers. I can just sit back and let my HYSA grow month after month. This is just one option, I could have also chose to leave 100% of my direct deposit to my checking account and set up an automatic transfer from my checking to HYSA on the 1st and 15th of every month in the amount of $____. Whatever floats your boat, baby!

When I set up this HYSA account, I designated it to be my savings fund for a future downpayment on a house. I know that 100% of this money, in the account, is set aside for that future expense. You can use your HYSA for multiple savings goals, you can combine the account to be your emergency savings fund + downpayment on a house fund, you just need to get specific with how much in the account is designated to which goal.

If you don’t already have a HYSA – let this be your sign to open one and let your money work harder!