Basics Explained: High-Yield Savings Accounts

We all want to reach a point where we stop working for our money and it starts working for us – generating more money as time goes on. But sometimes, we let that money sit in bank accounts – idle and not be of any use to us – but create more wealth for the banks.

If you want to earn more out of idle money or put some aside for future use towards emergencies or withdrawals, a HYSA might be a good (safe) bet. You earn more for every dollar you put aside which is not invested in stocks/bonds and does not go towards paying off credit cards or other bills.

What are high-yield savings accounts?

A High-Yielding Account is a bank account that earn a higher interest rate for deposits than a traditional account. There could be both Checking as well as Savings accounts that yield such results, but for now we shall focus on the latter. Such accounts are referred to as high-interest rate savings accounts. When it comes to savings, a higher interest rate is always the way to go. It means a better return on your money. The interest rate is what the bank will pay you for keeping your money with them.

The National Average yield is a abysmal .01 percent interest rate on a traditional savings or checking account, while APY (Annual Percentage Yield) on HYSA can range anywhere from 2 to 2.75%. Here’s how that difference plays out in real life based on a balance of $10,000 after 1 year, assuming no additional deposits:

Here’s an example for consideration

To explain what that means in real value, assume you put aside $1000 as an initial deposit in a HYSA with Marcus by Goldman Sachs (not sponsored). Using their online calculator, we can see a return of $249 over a period of 10 years. The current 2.225% APY compounds annually resulting in a near 25% return on savings – which is nothing to scoff at.

Now assume you start making $100 monthly contributions to this account, effectively compounding the total value month-over-month and in 10 years the resulting earn is $1678.

But is this insured or safe?

Like traditional savings accounts, high-yield savings accounts are federally insured for up to $250,000 if you open an account with a FDIC-insured bank.

How much should you be saving?

It mostly depends on two main factors – how much you earn and how much you spend. Ideally speaking, save at-least 4-5 months of your monthly budget that you may spend towards rent/groceries and essentials. If crisis heads your way, such as loss of a job, expenses not covered by insurance or any major financial issue, you have a safety net to protect you.

The last thing you want to do is turn to credit cards to pay for expenses – racking up debt you cannot repay, which is incredibly expensive if you can’t pay in full each month and can be damaging to your credit scores as your utilization rises. Not to mention the high interests you may accrue on unpaid balances.

Bottom line

If you want easy access to some of your money without opening a long-term certificate of deposit account with penalties when you want to quickly withdraw funds, opening a traditional savings account with a paltry interest rate or retirement or brokerage account for longer-term investments, a high-yield savings account may be a good middle ground. However, before you sign up for one, do your research.

Do your research and check out the interest rates from various banks and make sure you are eligible to receive the interest rates. Some accounts will require you to be a US Citizen. Most accounts are free or will be waived if you deposit certain minimums or require initial deposits. They will also have withdrawal/transaction limits in some cases (maybe 6 or higher).

Always consider a bank that’s FDIC insured so your money is protected in case of insolvency, and one that offers convenient services like online and mobile banking and the ability to easily transfer funds.

Compound interest is king when invested long-term

Let compound interest put your money to work for you and keep a healthy amount in a high-yield savings account for when you really need it.