What is a High Yield Savings Account?
A high-yield savings account (HYSA) is something worth looking into. It is the same as a savings account that you would normally have at your financial institution (aka bank) but it yields higher rates (as the name suggests). A savings account at Chase bank will likely lead 0.01% interest per year, whereas a high-yield savings account can yield 1 or 2%. That’s 200x more than a traditional Chase account! This may not seem like a lot, but let’s take an example to demonstrate what a difference this can make.
Let’s say you have a financial goal of saving for a home. You currently have $20,000 in the bank, sitting idle waiting for a few more pennies to roll in before house searching.
If it was sitting in a Chase account, you would make $2 over the course of the year. But, let’s say you put it in a high yield savings account such as Marcus which is currently earning 1.3% per year (which is actually a low rate due to COVID . About a year ago they were returning over 2% APR). Then you would get an additional $260 by the end of the year for doing nothing other than choosing a different place to store liquid cash.
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There are many options for HYSAs. Some offer you a sign-up bonus, and I know of a friend who treats HYSAs like credit card travel hacking. He signs up to get the sign-up bonus, then transfers the money to the next HYSA. This wasn’t on our checklist of requirements, however, below I detail what I would consider to be a good HYSA.
There is no fee associated with putting in or pulling out money from high-yield investment accounts. You can transfer directly from your bank or financial institution. There is no amount of time that you are required to leave it in the HYSA, although the funds may not be available for the first few days that you transfer it. Regardless, it starts earning interest on the day you transfer. And there is no minimum deposit. If possible, you want to choose an FDIC insured institution.
One should always remember, however, that the interest you gain is a taxable amount. Anyone who gains more than $10 in interest from a savings account will file Form 1099-INT which your bank will send you to include into your tax filings. So if you are gaining interest and pulling out your money, do make sure to set aside a little bit of that interest to cover the taxes. You are only taxed on the interest earned, not the contribution (aka the money you put in).
Shall I Always Put my Extra Money Into My HYSA?
The short answer is no.
Typically, you would want to invest in long-term investment accounts to get a higher rate of return. However, if you have short-term goals that you are saving up for, using a high-yield savings account is a great strategy. You don’t want to do active investments that are high-risk if you want to buy a home. It would be a shame to save up all that you need for a down-payment and then lose it all in an active investment. Plus, active investment isn’t our choice of investment strategy anyways. I wouldn’t recommend it, not because I have a low risk tolerance but because I honestly believe that no one can consistently beat the market. On the flip side, everyone can consistently make smart financial decisions that would earn them more money. More on this a different day.
Using HYSA In Our Student Loan Repayment Strategy During COVID-19
We just recently opened up our own high yield savings account with Marcus by Goldman Sachs. Prior to COVID-19, we did not have such an account because we were funneling all of our money towards my student loan, which had an interest rate of 6.5%. The more we paid it down, the less interest we would pay over time.
However, since COVID has reverted the interest rate of public student loans to 0%, we reduced our monthly contribution to my loans from $6.5k to $1k. We then funneled all the extra cash we had into a high-yield savings account to earn 1.3% interest. Before the student loan forbearance period ends on September 30, 2020, we will funnel all that money plus the interest earned into the debt.
It was a smart decision because when the COVID stay-at-home mandate started, everything was up in the air. We wanted to keep liquid cash in case of an emergency or a drastic change in income. We did not know if we would both be without jobs, or the extent to which the economy would be affected. Although we already had an emergency fund, the world-wide response to this pandemic was new to us and we did not want to take any chances. We approached it from a defensive stand-point. Surprisingly, it has worked well for us.
If you are paying down student loans, I would say there is still time (three and a half months!) to open a high yield savings account and earn a little interest passively. Then, without missing the deadline, make sure to funnel what you would normally (and then some) towards your student debt by September 30, 2020.
Also, some may ask, “Why do you still pay $1k?”. My minimum monthly payment is just under $1k normally, and although forbearance was granted to everyone without having an effect on your credit score, what most people don’t know is that forbearance still shows up on your record. It won’t mess up your record, technically speaking, but it can affect you financially. If you buy a home in the near future, for example, the mortgage lenders will see that you entered forbearance in 2020 and even though your credit score is 800, it may still affect their decision to lend to you. I didn’t want that on my record so I continued to pay it as if nothing happened. I simply stopped being aggressively paying my debt for the time-being.
Why Did We Choose Marcus by Goldman Sachs?
There are a couple things that we liked about Marcus.
They are an award-winning savings account that provides a rate that is 4x the National Average. They have no fees and minimum deposit. They allow same day transfers of $100k or less to and from other banks. They link other bank accounts for incoming and ongoing transfers which makes it very easy for me to simply log in and send money. You can open a personal account and/or joint account. And the savings are FDIC insured up to $250k (per person when considering joint accounts). This means that Mike and I can have up to a million dollars in their high yield savings account that is FDIC insured. How?
Mike opens a personal HYSA – $250k is FDIC insured.
I open a personal HYSA – $250k is FDIC insured.
We open a joint HYSA – $250k is insured for Mike, $250k is insured for me.
Lastly, we chose them simply because our roommate, Kirsten, used to work for a Goldman Sachs company. It is a reliable company and we trust our money with them. Simple as that. I know it’s a bias, so if you wish to shop the market, you can always shop the options here. I know of many people who have been happy at CIT Bank, if that helps. If you happen to choose to open a Marcus High Yield Savings Account using my referral link, you can receive an additional 0.20% Annual Percentage Yield (APY) on your Online Savings Accounts for 3 months.
Bottom line. I think it would behoove everyone to open a high yield savings account because many of us do save for short-term goals. We are all about earning passive income. I like to call it, free money. If you are looking to learn more, these resources are a great starting point.