What is a HYSA? It's an online savings account that gives 10-16x more interest than a normal bank account. Here is your ultimate guide to high yield savings accounts.
Did you know that by keeping your money in a standard bank account, you're actually LOSING money? To take that a step further, did you realize that you could be saving 10-16x more by just putting your saved money in a high yield account?
It's true. Inflation is making us all lose money when we keep our money in a traditional bank account. While there's no way to avoid it, inflation is a terrible thing so it's important to put your money in places that will financially benefit you the most. One of those ways is a high yield savings account.
With HYSA interest rates at a high of 5% right now, it's actually a bad financial decision to NOT be keeping your money in a HYSA!!
HYSAs have become more popular in the last 5 years as more banks turned to online services for customers and became more competitive.
A HYSA is one of those things that everyone should be doing, but most people don't realize they should have an account. Why? Usually, because they think it's too good to be true…and because it's easier to just do nothing.
A HYSA isn't a scam, but it's important to understand what kind of money and how much to keep in a high yield savings account…which we'll discuss today.
Let's dive in to this ultimate guide to high yield savings accounts.
This post is all about high yield savings accounts and how they make you more money.
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What is a HYSA?
A high yield savings account (HYSA) is an online bank account that offers a much higher yield interest rate than traditional banks. They typically offer 10-16x the interest rate of a standard brick and mortar bank.
These HYSAs work in a similar way as a normal bank (you log in to the account via their website, can see your money, can deposit money, etc). You also have customer service agents to talk to if you have questions, but there are no physical banks in your town to walk into.
Table of Contents:
- Why Have a HYSA?
- How Do High Yield Savings Accounts Work?
- Contributing to a High Yield Savings Account
- Things to Know About a High Yield Savings Account
- Recommendations for a High Yield Savings Account
Recommendations for High Yield Savings Accounts
I am continually looking for good HYSA recommendations for my readers.
Right now, in 2023, here are the two high yield savings accounts I recommend:
1. Axos Bank (HYSA)
Axos Bank makes it super easy to start an account and is my personal favorite. Their HYSA compounds daily, which means you will be earning compound interest DAILY instead of just monthly, quarterly, or yearly…which is pretty neat. They also don't have any fees and no minimum balance requirements. They are FDIC insured (an important thing to note) and require only $250 to open the account and will give you a free ATM card, if you need it. It's free to open an account to start earning today.
2. CIT Bank (HYSA)
CIT Bank is another HYSA I recommend. They are FDIC insured and don't have monthly service fees. You only need $100 to open an account and they have an automatic savings program that immediately will withdraw a certain amount per month that will go into your HYSA automatically so you won't have to think about manually putting money into your account. It's also free to open an account!
Why Have a HYSA?
Do you keep your savings in a traditional savings or checking account? Perhaps this is the same account you pay bills with.
Most people do.
Almost everyone keeps their saved money in a traditional savings/checking account. However, these accounts historically have the lowest interest rates. In 2021, the average interest rate for traditional savings accounts was .06% according to Bankrate.
This means that for every $100 you have in the bank, you make 6 cents per year. YIKES!
I'd venture to say you can hardly call those interest rates at all. A checking account usually doesn't even offer any interest at all. I know mine doesn't!
To make things worse, by keeping money in a traditional bank, you are actually LOSING money due to inflation. The inflation rate in 2022 alone was 6.5%. This means that if you had $100 in your bank account, it's now only worth $93.50.
Your buying power has essentially decreased because the cost of goods and services has gone up by 6.5% in 2022 alone.
Woof. I know, it sucks. This is why we need to do everything we can with our financial strategy to come out ahead.
A HYSA is one of those things that will assist us in our financial journeys.
A high yield savings account will give 10-16x more interest than a traditional savings account. In October of 2023, most HYSAs are offering 5% interest. That is HUGE!
The interest rates offered will vary based on the economy and will constantly change throughout the months/years.
EXAMPLE: Let's say you have $5,000 in savings for your emergency fund.
In a traditional savings account @ .06%, you would receive $3 per year in interest.
Via a checking account @ 0% interest, you would receive $0 per year in interest.
In a HYSA @ .5% interest, you would receive $25 a year in interest. That's 8x more!
In a HYSA @ 1.7% interest, you would receive $85 a year in interest. That's 28x more!
Remember, the interest rate offered in a HYSA will change based on many factors, explained below.
Why not earn more interest while your money is sitting stagnant in an account?
Can You Lose Money in a High Yield Savings Account?
No, you cannot lose money in a HYSA.
It operates as a bank account as long as it's a bank that is FDIC-Insured (read about things to look for in a HYSA here).
A HYSA is an easy way to make passive income without risk.
How Do HYSA Interest Rates Work?
A high yield savings account offers higher interest rates since they don't incur the overhead costs of traditional brick and mortar banks, but there are some important things to note about how the interest rates work.
How do HYSA's Offer High Interest Rates?
Since a high yield savings account is an online bank, they don't have the same overhead expenses as traditional banks you see on street corners (rent, employees, electricity, etc).
They are then able to pass on this decrease in overhead costs to their customers through higher interest rate returns.
Do HYSA's Interest Rates Vary?
Yes.
The interest rate you receive on a HYSA today may be different from the interest rate you'll receive next year or even next month.
These interest rates are determined by the Federal Reserve and are constantly changing.
For example, before COVID, the HYSA interest rate I was getting was 1.7%. After COVID, it went down to .5%. This is normal. Now, in October 2023, it is at 5%!!!!
It will fluctuate based on how well the economy is doing. However, it's much more than my checking account that earns 0% so I'll take it!
Also, the interest rate can never be negative so you won't ever lose your initial money. This is a no-risk, passive income investment. Once you earn interest, it doesn't ever leave your account.
What Determines the Interest Rate of a HYSA?
The Federal Reserve determines the interest rate offered on a high yield savings account. This is determined based on the economy and the direction of their monetary policy.
For example, when the economy was doing really well in January of 2020 (pre-COVID), interest rates for HYSAs were at 1.85%.
After COVID hit, they dropped as low as .45%.
Now, in 2023, they are at 5%.
Either way, I'd rather earn a higher interest rate than the .06% or 0% that savings and checking accounts give, respectively.
Contributing to a High Yield Savings Account
Let's discuss how to manage your money in a high yield savings account, how to make a contribution, and how this type of online bank works.
What Money Should Be in a HYSA vs a Traditional Account?
This is not financial advice, but I personally like to keep my emergency fund money (learn how to calculate your emergency fund needed) and 5 year goal money in my high yield savings account.
Why not keep all of my savings in this account? Great question!
Since a HYSA is offering a high interest rate, there are only 6 withdrawals allowed per month. Therefore, you will still want to keep your checking/savings accounts for paying bills, writing checks, etc.
*I'm going to say that again so the people in the back can hear.*
You are only allowed 6 withdrawals per month in a HYSA.
This is why we keep our checking/savings accounts for bills and writing checks. It's the only caveat to a HYSA…they actually want you to keep your money in there so they purposely limit the withdrawals.
This is fine though because this is just for our money that's sitting still (emergency fund money and 5 year goal money).
Let me know if you have any questions on this.
The high yield savings account is designed to be for SAVINGS, and will reward you for keeping your money in savings.
How Do You Open a HYSA?
The process of opening a high yield savings account is pretty simple and quick. It should only take about 5-10 minutes.
After you pick the bank you'd like to go with, you'll fill out the required information.
The information needed will vary based on the bank, but the common pieces of information you'll need are pretty basic:
- Your name
- Address
- Social Security Number (since this is a real bank that is FDIC insured)
- Sometimes your driver's license
Related Posts about Saving Money:
- 9 Money Saving Tips to Increase Your Savings Immediately
- Ultimate Guide to An Emergency Fund: Why You Need It
- Financial Tools–>Lisa's Favorite Tools for her Financial Strategy
How Do You Contribute to a HYSA?
It's very simple to start contributing to a HYSA.
Since we are keeping our savings/checking account, all you'll need to do is connect your checking/savings account to the high yield account.
You typically need your routing and account number to add the bank to the HYSA.
Then, just set up a transfer amount. Like I mentioned above, I recommend transferring in all of your emergency fund money and 5 year goal money.
Why 5 year goal money? Well, the way I see it is I would normally invest that 5 year goal money into the stock market or other investments. However, if I planned to purchase a home in 5 years and the stock market had declined, I wouldn't want to pull out that money and take a loss. Therefore, having that 5 year goal money in a high interest savings account will allow me to still accomplish my goals while being financially responsible.
While I love making money, I also believe life is meant for enjoyment….buy the Starbucks (if you want it), buy the dream house (if you can afford it), and go on the trip (always).
P.S. I believe travel is one thing in life you spend money on that actually makes you richer…
You can also typically set up recurring contributions per month so that you don't have to do the transfer manually.
Do HYSAs Have Physical Banks?
No, a high yield savings account will be an online bank only.
You will still have customer service options via telephone and possibly chat, but no physical bank to go into.
By not having physical banks that require high overhead costs, the online banks are able to pass those savings onto you via high interest rates. (Who even goes into their physical bank anymore anyways? I haven't been in years and i prefer to do everything online!)
If having a physical bank is important to you, a HYSA may not be the best option for you.
Things to Know About a High Yield Savings Account
Here are some additional things to know and understand about a HYSA.
Since they don't operate like normal banks, it's important to understand the minor caveats associated with a HYSA.
Is Interest from a HYSA Taxed?
Yes.
Since you are earning interest on your money, the government sees the interest you earn as taxable income.
Therefore, at the end of the year, you will receive a tax document from your HYSA that you'll report on your taxes as taxable income.
This is normal and not something to worry about since you'll be making more interest on the money than you would in a savings account anyway. You can learn more about taxes on HYSAs here.
Uncle Sam always wants his fair share, unfortunately…
How Many Withdrawals Can I Have with a HYSA?
This is important to note.
You can only have 6 withdrawals per month from a high yield savings account. Withdrawals are when you take money out.
This is standard across all HYSAs because this is a Federal Reserve requirement banks have to abide by.
Why is this important to note? Because you DON'T want to use this account to pay bills, write checks, etc. It should only be used for SAVINGS and they will reward you for saving money with that high-interest rate.
Is a HYSA FDIC Insured?
Yes, most are. However, make sure you ONLY go with a high yield bank that IS FDIC Insured. This is very important.
Why is this important?
The government will basically step in and support the money you saved with that bank should things hit the fan and your money is gone. You need to always bank with FDIC-insured banks only.
Does a HYSA Have a Minimum Balance Requirement?
Some HYSAs do have a minimum balance requirement so you'll want to make sure you look for that requirement before choosing your bank.
This is different from the initial deposit required. For example, some HYSAs require $100 to open an account, but then don't have a minimum balance requirement that you always have to keep in there.
Hopefully that makes sense. Don't stress too hard on this one, but check for any minimum balance requirements.
Does a HYSA Have Monthly Fees?
This is something you need to check to make sure of before signing up. Always look for an account that DOESN'T have monthly fees.
There are plenty out there and my favorite recommendations for HYSAs are below.
What is the Downside of a High Yield Savings Account?
There are very few downsides to a HYSA. However, there are a few cons of a HYSA.
It's important to note that you can only do 6 withdrawals per month which is why we keep our savings/checking accounts for bill paying.
They also usually don't offer ATM cards. Some of them do though! However, I prefer NOT to have one since I can only make 6 withdrawals anyways. This way, I'm not tempted to purchase things with that card.
I see my HYSA as strictly a savings account for my financial goals.
Still undecided? Check out my post on the 5 checklist items you need to look for when selecting a high yield savings account.
If you have any questions, feel free to email me at thefinancialcookbook@gmail.com.
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- 8 Unique Ways to Save Money as a College Student
- The BEST Unique Tips to Save Money on a Wedding
- 9 Money Saving Tips to Increase Your Savings Immediately
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Thank you so much! This was so easy to understand and very helpful!
I’m so glad it’s helpful! Thanks for the kind feedback!
Thank you so much for adding in your recommendations! Great article.
You’re so welcome! Thank you for the kind feedback. I’m glad it’s helpful! =)
Thank you for this article! It’s a lot easier to understand. It is now 2023 though, any thoughts on what bank to choose from or what would you recommend this time? Thank you 🙂