What’s a HYSA and why you need one

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Are you tired of earning pennies in your savings account? If so, a high-interest savings account might be just what you need. But with so many options, how do you know which is best for you? In this article, we’ll explore what a high-interest savings account is and what to look for when choosing one.

What is a High Yield Savings Account and why do I need one?

Lee en español ¿Qué es una cuenta de ahorro de interés alto?

Banks use your money -including what you have in your savings account- to make money. They borrow it and lend it to other people that will pay it back to them plus some interest. This interest is how they profit from your money. In return for banking with them, they pay you a small percentage.

If you keep your savings in a brick-and-mortar bank, chances are that the interest they’re paying you is very low, and this is why switching to a high-interest savings account can be a game changer.

What is a High Interest Savings Account?

A high-interest savings account, best known as a high-yield savings account (HYSA), is a type of savings account that offers a much higher interest rate than a standard savings account. This means that you can earn more interest on your savings over time.

As an example, at the time of writing this post the average APY of a traditional savings account is 0.37%, and my HYSA has an APY of 4.25%. If I make a $5,000 deposit into a traditional savings account with a 0.37% APY, I will have a total of $5,019 at the end of one year. Conversely, if I save it in my HYSA at 4.5% APY, at the end of the year I’ll have $5,230.

Maybe you think a difference of $211 is not much, but what if you were saving to buy a house very soon?

Let’s say you have an initial deposit of $20,000, your goal is to reach $35,000 and each month you save $300. With your traditional savings account with a 0.37% APY, it would take you just over 4 years to reach your goal, while it’d take you only a little more than 3 with a HYSA at 4.5% APY. Do you see the difference now?

HYSAs are typically offered by online banks and credit unions, although some traditional brick-and-mortar banks may also have them. The interest rate of these accounts may be variable or fixed. Also, they can be subject to certain conditions, such as a minimum balance or a limit on the number of withdrawals per month.

How does High Yield Savings Accounts work?

A high-yield savings account works just like a traditional savings account. You open the account, link your checking account (either from the same bank or an external account), transfer money, and voila! Your money will start earning a higher-than-average interest. Like a traditional account, you can access your funds by transferring them to another account or withdrawing from an ATM (depending on the bank).

What’s APY and what does it mean?

Annual Percentage Yield (APY) is a rate that reflects the total amount of interest paid on an account, based on the interest rate and the frequency of compounding, for 365 days. In short, the APY reflects the actual rate of return that your investments will earn. The higher the APY, the more interest you’ll get paid!

Now here comes an important part that many people lose sight of, analyzing how often the interest compounds. Let me explain.

Compound interest and Compounding frequency

Compound interest is interest earned on the interest. The difference between simple interest and compound interest is that simple interest is calculated on the principal amount while the compound is calculated on the principal plus the interest accumulated from previous periods.

For example, a principal of $5,000 with a simple interest of 5% will pay you $250 after one year ($5,000 x 0.05 x 1). The same $5,000 with a compound interest of 5% with an annual compound frequency will pay you the same $250. However, if the interest is compounded monthly instead of annually, it’ll pay you $255.81.

Why does it pay more? Because your money earns interest based on the amount of the previous period, not on the principal. That is why your money grows exponentially and not linearly. You can use a compound interest calculator to play with the numbers yourself.

Why should I open a High Yield Savings Account?

We know that personal finances are personal, and everyone makes decisions based on their circumstances and goals; however, there are three funds for which I recommend using a high-yield savings account. Keeping these in a high-yield savings account ensures your money is safe and easily accessible while earning higher-than-average interest, making it a smart financial move.

1. Emergency fund

An emergency fund is a pool of money that you save to cover unforeseen expenses or emergencies, such as a medical emergency, job loss, or unexpected expenses. This fund is there to help you avoid going into debt or relying on credit cards when faced with unplanned bills.

The general recommendation is to keep at least 3-6 months of living expenses in this fund.

2. Sinking funds

Sinking funds are savings accounts for dedicated and expected expenses that are not frequent or recurrent, such as Christmas gifts, vacations, car maintenance, insurance, yearly subscriptions, and home renovations.

The amount of money you set aside for each sinking fund and the frequency will depend on the goal and deadline. Continue reading to understand how I use my HYSA to allocate my money in “buckets” for this purpose.

3. Large purchases

If you have big purchase goals (which normally are long-term), like a down payment on a house, a car, a mentorship, or going back to school, a HYSA is a good option because compound interest can help you reach your goal sooner!

What to look for in a High Yield Savings Account?

Remember, personal finances are PERSONAL, and what’s best for one person is not necessarily for another. Therefore, we’ll discuss what you should consider when analyzing options for HYSAs.

1. APY

As mentioned before, APY is a rate that reflects the total amount of interest paid based on the interest rate and the compounding. However, when comparing different accounts, ask these questions:

Is the APY a promotional rate with a limited period? Is there a minimum or maximum balance requirement to earn the advertised APY? Do they offer a referral program that offers additional APY for an extended period?

2. Initial deposit an minimum balance

Some require a minimum deposit to open the account and maintain a certain balance.

3. Access to your money

You’ll want to access your money quickly and easily, especially your emergency fund. At the same time, you should know if you can link your checking account and how long transfers take.

Can you withdraw your money when needed, or how long does it take? Are you able to withdraw money using an ATM?

4. Fees and penalties

Does the account charge maintenance or service fees? Do they charge a fee for wire transfers or transfers from an external bank? Is there a penalty for exceeding a certain amount of withdrawals per month? Is there an inactivity charge?

5. The financial institution

Is this account with a bank or a credit union? If it is a fintech company, who provides the banking services? Are they FDIC-insured? How long has it been around? Do they have good reviews? What’s their reputation? How is their customer service?

Almost no one highlights the importance of knowing where and to whom you entrust your money. I mean, this is your hard-earned money! You can’t put it anywhere, right?

Do your research before deciding on an option. The account with the highest APY, while tempting, may not be the best decision.

What High Yield Savings Accounts do I use?

Disclaimer. I’ll talk about the accounts I’ve decided to use based on my circumstances and goals. Remember that what is best for me will not necessarily be the best for you and your goals.

1. Marcus by Goldman Sachs

I keep my emergency fund in this high-yield savings account.

I like Marcus because it has higher APYs than other accounts, it has no fees or minimum to open accounts, the process to open an account is straightforward, the app is easy to use, I have access to higher APYs by referring friends and family, and customer service is good. Additionally, Goldman Sachs is a bank that has been around since 1869 and is FDIC insured.

At the moment of this writing, I have a little more than $15,000 and receive $54 a month in interest paid.

High yield savings account Marcus APY 4.4%

2. Ally

I keep my sinking funds with Ally. I chose this account because it can separate your savings into “buckets,” something that I have not seen very often with other financial institutions and which has been very useful for me.

Allocating my money in buckets allows me to visualize how far or close I am to reaching my goal, and when I need to withdraw money from a specific fund, I take it directly from that “bucket.”

High yield savings account Ally buckets

The money I keep varies, but it’s typically around $4,000. The average interest that I receive is $13 per month.

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Fernanda, "Relentless Latina" founder, wearing a white shirt with the word "Relentless"

Fernanda is an immigrant from Mexico and a Latina Money and Career educator.

After being rejected from her first engineering job for being a woman and spending the first years of her career overworked, underpaid, and broke; she decided to educate herself about money and career growth.

In 6 years, not only she became an engineer, but also moved to the US, pivoted careers, got promoted to manager, raised her salary to six figures, and became an investor on track to be a millionaire.

Now as the founder of Relentless Latina, a platform for women to find tools, resources, actionable strategies, and motivation to grow their careers and money, she’s on a mission to help Latinas build fulfilling high-paying careers, advocate for their worth, increase their income, and build wealth.