Disclaimer: I am not a financial advisor, please consult your financial advisor or do your own research
before applying any of my monetary strategies to your own situation.
What is a HYSA?
A HYSA (High Yield Savings Account) is a savings account, meaning usually only 6 transactions per quarter. HYSA’s offer a higher rate of return than most local bank savings accounts. Generally, savings accounts have around a 0.1% interest rate, HYSA have up to 0.5%-1.0%. This rate is often variable, but it will be better than 0.1%.
Why do I need a HYSA?
A few different factors come into play with whether or not an HYSA is the best route. I’m going to assume a basic financial structure. The HYSA is a great holder for your emergency fund. An HYSA would be great as a bucket of money that maintains capital and will cover your family’s monthly expenses for at least 3 months. Another more complex reason is if you are moving around investments and have funds earmarked for a project or trip. Why, you ask? If the money gets put into the stock market, there’s no guarantee on maintaining capital, but also the money is subject to short term capital gains tax. To determine what avenue is best, you will have to look at your overall financial picture.
HYSA are also a great way to get your feet wet in the investment world. There’s minimal risk and not a whole lot of variables aside from maximum transactions per quarter AND a penalty if you close the account within 60-90 days of opening the account.
How to get an HYSA?
With everything online these days, moving money around is pretty painless. Oh, and, if your bank is still charging you a $5 money transfer fee, switch banks. A quick Google search for best HYSA will give you loads of options — Barclays, Citi, Vio, Alliant, etc. Pick a name you recognize and pick a competitive rate. Once again, make sure to do the research, some HYSA will have a minimum dollar amount to get the higher rate. Set up the account and wire the money. That’s it!
The Math
A quick run through the standard investment scenario (which assumes an initial investment of $10,000). You can use this great calculator from NerdWallet.
Standard Savings Account
Cost Basis $10,000
APY 0.1%
Balance 1 yr later $10,010
What this means – the bank borrowed $10,000 and only paid $10 in interest to you.
HYSA
Cost Basis $10,000
APY 0.5%
Balance 1 yr later $10,050
What this means – the bank borrowed $10,000 and paid $50 in interest to you.
We are only getting started!
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I’ve seen a lot of talk about doing away with a traditional “emergency fund” (i.e. savings/HYS) and moving toward having the money invested in such a way it is easily and quickly liquidatable (I may have made that word up :)), i.e. stocks. Have you heard similar?
Erin, That’s a great question! There are two schools of thought on this: 1) people who were invested during the DotCom bubble burst in the late 90s would take a more conservative approach and say maintain some capital in a conservative account, such as the HYS OR 2) invest in the stock market because the ROI will usually be much greater than a HYS. Even though technology makes moving money fairly easily, there is still a waiting period. If you have your money invested in index or mutual funds, it takes a few days to liquidate and get the money in your bank account where you can spend it. What I do is a blend — I keep some funds highly accessible in a HYS, but I don’t have all of my emergency fund in an HYS. I hope this helps! Let me know if you have any other questions! 🙂