999. Laura reviews what you should know about using a high-yield savings account (HYSA) and six tips for choosing the best one.
999. Laura reviews what you should know about using a high-yield savings account (HYSA) and six tips for choosing the best one.
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Rita asks, “What’s the best high-yield savings account?” Thanks for your pointed question, Rita! I love that you’re thinking about making your money work harder by earning a higher interest rate.
Hey, everybody! This is Finance Friday, a special edition of Money Girl, where I answer your burning money questions. I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, that's my Substack newsletter. You can sign up for The Money Stack and learn more at LauraDAdams.com.
This is episode 999, and as I’ve mentioned in the past few episodes, I’m planning a special show for 1,000! To celebrate, I’ll feature comments from listeners and friends like you. I’d love for you to participate by calling 302-364-0308 and leaving a brief message–you might even hear it on the 1,000th show!
In today’s podcast, I’ll answer Rita’s question by reviewing how high-yield savings accounts (HYSAs) work and six tips for choosing the best one.
So as the name applies, a high-yield savings account pays a higher, sometimes much higher, interest rate than a traditional savings account. The highest annual percentage yields (APYs) are usually offered by relatively small or exclusively online banks, which have lower operating costs than banks that prioritize local branches, which come with many expenses, such as rent, personnel, equipment, and property maintenance.
An online bank’s savings can be passed to customers through various benefits, including higher interest rates, allowing your money to earn more. However, there may be exceptions, such as a local credit union that offers competitive rates. So, it’s always best to shop and compare accounts.
Consider the following six tips when comparing HYSAs so you keep your cash in the best place possible.
1. Look for more frequent compounding.
Banks state their interest rates as annual percentage yields (APYs), which reflect compounding. Note that an account’s annual percentage rate (APR) doesn't include compounding. So, pay attention to an account's APY and the compounding frequency when comparing your options.
For instance, annual compounding means interest is only calculated and paid once a year. Many banks offer monthly compounding, where interest gets calculated and paid monthly.
The best HYSAs have daily compounding, where you get paid daily. A savings account that pays interest more frequently is better, even with the same interest rate, because you earn more.
Let's say you put $10,000 in a typical savings account that pays 0.1% APY and compounds monthly. At the end of the first year, you'd earn approximately $10.
But if you choose a high-yield savings account paying 4% APY with daily compounding, a $10,000 deposit would give you about $408 at the end of the first year. And, the higher your balance and the length of time you keep savings in a high-yield account, the more growth you’ll receive.
2. Understand that APYs can change.
Savings accounts typically offer variable interest rates that are tied to the federal funds rate. That means the APY can move up or down at any time. While banks aren’t required to update their rates the moment the Federal Reserve changes interest rates, most eventually adjust them.
Also, some HYSAs offer sign-up bonuses. These are higher rates for new customers that may decrease after a promotional period ends. In addition, some of the highest savings rates may apply only to deposit tiers, such as amounts up to $5,000 or $10,000.
For instance, you might get the highest interest rate on your first $5,000 but a lower rate on amounts above that. Ensure the high rate you’re looking at applies to your entire balance, or at least a large portion of it.
HYSAs may also require you to maintain a balance or make a certain number of monthly deposits to qualify for their top rate. So be sure you understand the terms you must meet to keep an enticing APY as high as possible.
The fact that savings APYs are variable and may change based on how much you deposit makes it difficult to answer Rita’s question! Plus, the interest rate is just one factor to consider when choosing an account. At the end of the show, I’ll recommend a few places that make it easy to compare HYSAs.
The fact that savings APYs are variable and may change based on how much you deposit makes it really difficult to answer Rita's question with just one best account. Plus, the interest rate is just one factor to consider when choosing an account. Now at the end of the show I will recommend a few places that make it easy to compare high yield saving accounts, so stay with me.
3. Watch out for fees.
Another high yield savings account rule to know is when the account charges fees. For instance, if an account requires a minimum balance, you'll get charged a monthly fee if you don't maintain it.
While most high-interest accounts don't charge excessive fees, you typically pay for transactions like overdrafts, using an out-of-network ATM, and making wire transfers. But you shouldn’t pay a monthly fee for the privilege of letting a bank hold your money. And that monthly fee could easily wipe out the benefit of getting a higher interest rate in the first place.
There used to be a federal law that limited withdrawals from traditional or high-yield savings accounts to six per month. But the Fed suspended that rule during the pandemic, and it hasn’t been reinstated. However, some banks may still charge an “excessive use fee” if you exceed a certain number of monthly transfers, such as six or ten.
4. Get deposit protection.
Opening a high yield savings account at a bank or credit union insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) protects your money up to a legal limit. Both types of insurance cover up to $250,000 per depositor, per ownership category (such as individual or joint), per institution.
With deposit protection, you’ll be reimbursed within a few business days, if your traditional or HYSA institution fails. So, never put cash in a bank or credit union that doesn’t offer insurance.
But you maybe thinking, "well, Laura I've got more than $250,000 in savings." In that case, I recommend spreading it among multiple insured banks or credit unions, so the full amount is protected.
Some institutions even offer deposit insurance with higher limits, such as up to $1 million. So, speak with a bank representative to learn more about protecting large amounts of savings.
LISTEN ALSO: FDIC and SIPC rules–how much money do they protect?
5. Be comfortable with online-only access.
Most HYSAs allow you to access funds through online platforms, mobile apps, and debit or ATM cards. Since they’re typically online-only banks, they may not have a physical branch that you can visit.
So, if you prefer face-to-face customer service or regularly need to deposit cash, a HYSA may not be the best choice. However, some online banks partner with ATM networks, allowing you to deposit cash, though it can be a hassle depending on where you live, how far you are from one of those ATM machines.
Your ability to make withdrawals and transfers anytime makes a high yield savings account the perfect place for emergency cash and money allocated for short-term goals.
6. Know the right amount to save.
Since savings accounts pay a known interest rate and most are insured by the FDIC or NCUA, they carry virtually no risk. That’s different from investments, such as stocks and index funds, which fluctuate in value.
That’s why it’s essential to save and not invest, money dedicated to short-term goals, like maintaining an emergency fund, taking a vacation, or buying a car in the next few years. You can rest easy knowing your cash will be there, plus some interest, when you need it.
However, it’s generally not wise to save money for long-term goals like retirement in a HYSA. Most investors need to earn higher returns to keep up with inflation and accumulate a significant nest egg. Keeping all your money entirely safe could leave you short on the income you need to live comfortably in retirement.
RELATED: Should I use extra cash for savings, investments, or debt?
So if you are like Rita and looking for a high yield savings account, like with any financial institution, you will have to provide your full name, address, social security number, and a government issued ID to open an account. Then once it’s open, you can link it to your checking account for easy withdrawals and transfers, including your initial opening deposit.
While an online-only bank may not be the best option if you need in-person service or a wide range of banking products, using a HYSA with a competitive APY, no fees, and user-friendly features is a terrific way to earn more on your savings compared to a traditional bank savings account.
Some great places to shop for a HYSA include Nerdwallet, Bankrate, and Finder. If you already have credit accounts with well-known institutions like American Express or Discover, they offer HYSAs with reliable APYs and excellent customer service. In addition, if you have an investment account, such as a brokerage or IRA, the investment platform may also offer a competitive HYSA.
So Rita, instead of trying to find the “best” HYSA, or one with the highest APY possible, I would encourage you to open one with the features I covered here. It should be easy to use and offer a competitive, steady APY.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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