In Chapter 2 we introduced readers to High Yield Savings Accounts
(“HYSAs” from here on out… for my own sake). A quick refresher on these things: they’re great places to house extra cash and/or emergency funds. What makes them so great? Well, you’ve gotta put that money somewhere, and these puppies yield 10-20x more than a normal savings account. Hence the“high yield” part.
(If you just want our recommendations, you can scroll straight to the bottom. If you wanna learn something along the way, keep reading)
Most standard savings accounts(e.g. with Bank of America or Chase) have Annual Percentage Yields(APY) of roughly .06% or less. That means, if you have $100 in one of these standard accounts, at the end of a year, you’ll have a whopping $100.06. That is not very good. Especially when compared to HYSAs which tend to have much higher APYs. How much higher? Well, it fluctuates. And we’ll get to why in a second.
HYSAs came onto the scene with the rise of mobile banking.
Companies that were entirely internet-based could offer higher yields because they weren’t paying bank tellers to sit behind glass panes at branches all day(or paying rent on those branches… I’m oversimplifying a little, but the point is: internet-based businesses tend to have better margins than brick-and-mortar businesses and those improved margins mean better products for the customer).
So these mobile-first banks were like,“hey, give us your money and we won’t pay you that paltry .06%… we’ll pay you 20x that!” Sounds great. Is great. But it came with a few catches. There were initial deposit requirements and minimum balance requirements and transfer limits and occasionally fees(no free lunch amirite?). Over time, these things have sort of faded into the shadows, which is great for consumers. The accounts we recommend below don’t force customers to make these concessions, which is why we’ve recommended them. Nice.
Here’s the thing though: APY is always fluctuating.
In case you missed it earlier, APY stands for Annual Percentage Yield. It is just a fancy way of saying the annual amount the bank pays YOU to house your money.
APY is always fluctuating because banks are guard-railed by this thing called the Federal Funds Rate. This rate is set by a committee of the US Central Bank(“The Fed”). This committee meets eight times a year to determine the rate, the rest of the year is spent on yachts with lobbyists(presumptuous on my part? perhaps).
Quick definition: the Federal Funds Rate is the rate that commercial banks can lend and borrow from each other overnight. Why would they need to do this you ask? Because they have to meet their“reserve requirement”.
The reserve requirement(I realize we’re on a bit of a tangent here, try to enjoy the process), is the amount of money banks need to keep on-hand, overnight. This requirement is about 10% of total deposits.
What does that mean for us?
If I deposit $100, the bank only needs to have $10 of that at a given time. Kind of a crazy concept, but this is how banks make money(they use your deposits for their own purposes, i.e. loaning out to borrowers and collecting interest on those loans). It all rests on a big assumption that everybody won’t need all their money at a singular point in time. In extreme circumstances, banks have failed and lost people’s money. This is why FDIC-insured banks are popular. In the case of a bank failure, depositors are typically insured up to $250k.
Back to my point: banks are guard-railed by the Federal Funds Rate. This rate has all kinds of other implications — the interest rates on mortgages, credit cards, and loans, effects on inflation and deflation, etc. The Fed can’t enforce this rate, but it’s in banks’ best interest to abide so that they can offer the best rates to their customers(that’s some free-market logic right there, and in this instance, it works pretty well).
As I write this, our economy is in a tough spot.
And because the Fed’s job is to maximize economic output and minimize unemployment, the Federal Funds Rate is low. This means interest rates are super low, which encourages lending and borrowing to juice the economy(i.e. it’s“cheap” to take on debt). This is great for borrowers, not so great for savers because it means APYs are low. And so at the moment, HYSAs are not yielding quite as much as they were back in February 2020.
Low rates aren’t forever
Ultimately the economy will recover and interest rates will go up(because the Federal Funds Rate will go up), and yields on HYSAs will go back up too. And hey, even if they are“lower” than normal, they’re still a hell of a lot better than normal savings accounts(compare an HYSA’s 0.60% with standard saving account’s 0.06%).
So what do we recommend?
Here are two highly popular options and one… fun/weird one. Oh, and I’ll add that these aren’t sponsored, we just like them(and they are all FDIC-insured).