High-yield savings accounts (HYSAs) are really hot right now š„. Chances are you have seen them mentioned by a finfluencer or in an ad at some point this year. What are they and why are they so popular all of a sudden? In this post, weāll discuss what makes them different from other
savings accounts and why they are so hyped right now.
True to their name,
HYSAs are savings accounts with high yields which means they pay
high-interest rates. At the time of writing, the
banks advertising
HYSAs are paying anywhere from 1.5% - 3.11% per year. That is compared to the national average of 0.17% provided by the Federal Deposit Insurance Corporation (FDIC). While none of these rates sound very high, letās take a closer look to see how a small percentage can make a big difference.
For simplicity, letās compare a
savings account paying 0.20%, just higher than the national average, to a
HYSA paying 2%. You have $100 to deposit into your new account. If you put the $100 into the 0.20%
savings account and did not touch the account for a year, you would have $0.20 in
interest by the end of the year for a new balance of $100.20. If you put the $100 in a
HYSA instead, you would have $2.02 in
interest by the end of the year for a new balance of $102.02. Neither makes you rich, but $2.02 is 10.1x more than $0.20.
Now letās raise the stakes a little. Say you have been building up your
emergency fund and it now has $5,000. Itās currently sitting in a
savings account with an
interest rate of 0.20%. The balance will be $5,010.00 after a year. If you transfer it to the
HYSA with the 2% rate it will have a balance of $5,100.92 at the end of the year. Thatās over $90 for free just from making one transfer š. This is an easy example of putting your money to work instead of working for your money.
Why are you just now hearing about this?
HYSAs arenāt new and some financial experts have been promoting them for years. However,
interest rates hit historical lows near 0% during the Great Recession. While rates fluctuated slightly, they didnāt really start rising again until March 2022 š. Weāll save the economics lesson for another day. But whatās key is that the Federal Funds Rate, which acts as a benchmark for
banks, has risen from 0.25% in March to 3.25% at the time of writing in October 2022. Most
banks have increased their
interest rates in response, but some more than others. In summary, this is getting lots of buzz because, for over a decade,
interest rates were so low even on
HYSAs that they werenāt always worth mentioning.
It should be obvious by now that opening and transferring your money to a
HYSA should be on your financial checklist āļø. But when youāre
shopping for a new account, donāt forget to consider fees, minimum balance requirements, and the options available for accessing your money. Also, make sure the HYSA has FDIC or NCUA insurance to protect your money if the
bank or credit union goes out of business. With that, congrats on taking a step toward putting your money to work for you š!
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