High Yield Savings Accounts – Worth it and When?

In this episode we explore high yield savings accounts or HYSAs. Some may hear the word high yield and think it is great fit, but there are some things to consider when reviewing if it is right for you.

Summary – Cents of Security Podcasts Ep. 73

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement:

Welcome back to the Cents of Security Podcast. I’m Cassidy Clement, Senior Manager of SEO and Content and Interactive Brokers. And today I’m your host for our podcast. Our guest is Elizabeth Ayoola, NerdWallet’s personal finance expert. In this episode, we’re going to be talking about high yield savings accounts or HYSAs. Some of you have heard of high yields and think, wow, that’s great but there are some things to consider when reviewing it. So welcome back to the podcast, Elizabeth.

Elizabeth Ayoola:

I’m happy to be here again. How are you?

Cassidy Clement:

I’m doing all right. So today we’re going to be talking about some high yield savings accounts, which in today’s world is something that everybody usually is talking about. You know, how do I make my money work for myself? How is it working for me? How are these interest rates positive or negative impacting me? When we get into this, usually, people immediately start thinking, okay, wait a second what did I hear about this at my bank? Or what did I hear on a recent commercial? But I think it’s pretty important to understand how you can get access to these and obviously the definition of them. So if you were to explain to listeners what exactly a high yield savings account is and how they can gain access to it, that would be very helpful.

Elizabeth Ayoola:

Of course. So I think the simplest way to put it is that a high yield savings account is very similar to a traditional savings account and even a checking account. The main difference is that it pays more interest than the two that I just mentioned. Another thing to think about is that high yield savings accounts are usually offered by online focus banks and credit unions, but you can also find them at traditional banks as well.

Two other things I’ll mention is that high yield savings accounts usually are FDIC insured up to 250, 000 per depositor, per insured bank, and per account ownership category. And then I’ll just tee that definition up with ultimately, high yield savings accounts can be like low hanging fruits for people who are seeking passive income, and that would be someone like me.

Cassidy Clement:

So what exactly is the process like for someone to go about opening one of these accounts? Is it similar to just opening up a bank account, or is it a little more involved because you may have to submit a new application, or maybe you have to put a certain amount in for a certain rate.

Elizabeth Ayoola:

So it’s pretty straightforward, I would say. Well, I don’t want to say straightforward because everyone finds these things, I guess, more challenging than others, but it’s pretty similar to opening a checking account or any other saving account. So you will need to provide your basic information and I also want to point out that the process may vary slightly from bank to bank.

So the important thing before opening up the account is to look at what the requirements are for that specific account, so that you know whether it’s feasible for you or not. But usually it’s just basic information. You put in your information and you wait for an approval. But as you correctly mentioned, sometimes there are requirements in terms of how much you have to put in the account to open it.

Cassidy Clement:

Are there certain types of aspects or specificities that people should think about when they’re shopping around? Like I mentioned in the intro, you know, most people will hear high yield and think, oh, perfect, I’m in. That’s enough. That’s all I have to hear. But there may be some other factors. I know like in my research, the main things that came up were interest rates, balance requirements, and fees. But are there any other things that you would say to the listeners that are really crucial when you’re picking your final contenders, we’ll say, for where you could open these accounts?

Elizabeth Ayoola:

Yeah, I mean for some accounts also what you want to pay attention is the fine print around closing the account. If for any reason, let’s say, you sign up and maybe you don’t like the account or you feel like you don’t need it, some banks might have some kind of penalty or restrictions in terms of you closing the account. So you want to pay attention to that too. Another thing to think about is if you’re a little traditional and you like to go, or not even just traditional, but you have cash, right? And you like to go into the bank or to an ATM to deposit cash, you need to ensure that the bank that you choose has a cash deposit option.

I personally have a high yield savings account and the one that I have doesn’t have that option. So it means in order for me to make deposits, I have to basically do a whole run around. And usually that means sometimes having to ask a friend to transfer or transferring from another account into that account and so on and so forth. So these are things that you want to think about in terms of convenience. And also what your daily, banking needs are.

Cassidy Clement:

So with all of these different accounts that are advertised out there and rates are obviously the main thing we’re focusing on here in terms of the ROI the return on investment, but there are so many different rates out there and somebody might think, I see all of these, that’s great, but I don’t know if it’s the right time for me to start to do this type of investment. For all of these different pieces that people are taking in to synthesize, when would actually be the right time? Kind of a proper or the right time for certain scenarios we’ll say, for people to enter the market in starting an investment like this.

Elizabeth Ayoola:

Well, the thing that I love about high yield savings accounts is they’re not exactly an investment. So it’s just a vehicle, or you could say a house for your money. So with investments, for example, like in the stock market, there is a risk of losing your money. But with high yield savings account, assuming that you have chose an FDIC insured account, you should not lose the money that you put in there. So with that said, I feel like high yield savings accounts are evergreen and there is no wrong time per se to put your money in there. I think a bigger question that people should be asking is how much of my money should I put into a high yield savings account? So the recommendation is usually that it’s a good place to put short term funds, such as an emergency fund, for example.

So you may put three to six months of emergency funds into your high yield savings account, or let’s say that you are going on a family vacation within the next couple of months, you might want to put it in there so that it can gain some interest as well. So with that said, consumers have very little to lose and a lot more to gain because you’re essentially just putting your money, which would be sitting in a checkings account, at let’s say one percent or lower interest rate, and you’re putting in an account that could get you a four to five percent interest instead, and you literally don’t have to do anything.

Cassidy Clement:

Yeah, and I mean, another piece that I’m sure you could speak on more is something to do with the annual percentage that gets yielded versus some of the account fees that may be associated. If it’s an emergency fund, you know, how much is going out for other types of fees or how much is getting built on that during that time? That kind of leads me into my next question, which is at what point would someone say, okay, it’s worth it for me to open one of these high yield savings accounts or is it more dependent on the person themselves financial goal, or maybe if it’s a family, the family’s financial goal?

Elizabeth Ayoola:

I love that question. So you’re absolutely right. Any financial decision that you make, you should think about your own personal financial goals. But I will say as it relates to weighing out the cost of the account, that is so, so important. So as we mentioned, or you mentioned earlier, you do want to look at what are the maintenance fees for this account. If I go below a certain minimum, what am I going to be charged? You want to calculate all of that and see if it’s worth the interest that you’re gonna gain. Now for listeners who may be like, I have no idea how to do that. One good place to start, maybe a compound interest calculator or a savings calculator. We have both of those on nerdwallet.com, and what you can do is type in how much you would potentially save, the potential interest that you would get maybe from the banks that you’re looking at. And that will give you, within a couple of seconds, the amount that you would get in interest from putting your money in the account over a set period of time. So now once you have that number, you want to calculate what the potential fees are and obviously deduct that from the potential interest to see if it’s worthwhile. But I do want to put it out there that there are banks with little to no fees, high yield savings accounts.. I personally have one. So ideally you probably want to be looking for a bank that has little to no fees.

Cassidy Clement:

So, when people are looking at something like this account, should they be asking about the long term or short term strategy? Are these utilized more from a short term perspective, or is it something that could be utilized in all types of investment strategies or structures?

Elizabeth Ayoola:

Yeah, so I like that question because ideally every account that you open or kind of financial move you make should be part of a larger financial strategy. So one of the basis of personal finance is having, as I mentioned earlier, an emergency fund. And even if you don’t have an emergency fund, there are probably daily expenses that you use your checking account for. So it is something that you can incorporate to your larger financial goals and that can be, again, both short and long term. So ideally you just want to think about how if this is a decision you make, a high yield savings account will take you closer to whatever your financial goals are.

I personally opened one because one, I wanted to earn passive income, and two, I wanted somewhere where my bulk emergency fund could sit and I could earn money on it without having to do anything. But of course, you don’t want to put too much cash inside of a high yield savings account. Again, going back to you, whatever your financial strategy is, you may put any excess funds you have in the stock market or towards whatever other goals that you have.

Cassidy Clement:

We talked about fees a little bit, but now what about the initial spot of people saying, okay, great, fine with those fees, found this, it looks good to me. But like some other investment vehicles or just accounts, are there required minimum deposits? Can’t really say minimum investment for this since it is an account, but is there some type of minimum that needs to go into these accounts or is it more of a varying thing where it varies maybe per interest rate or per bank or per company?

Elizabeth Ayoola:

It definitely varies and that’s why I really appreciate comparison articles because what it will do is take some of the factors that you mentioned and list it, you know, side by side for the different banks. So yes, some banks do have a minimum requirement. Others don’t have any at all. So you can open the account with zero dollars in, and they also don’t have maintenance fees.

So again, it’s about understanding what your personal banking needs are and which bank best aligns with that. But, you know, if you’re looking to save money and get as much interest as possible without fees eating away at it, then you definitely want to look at, you know, zero minimum balance requirements in case there are months where you don’t have much money in there so that you’re not being charged.

Cassidy Clement:

Yeah, what I found was interesting as well in my research, at least. The minimums were a little bit harder to find, when you’re doing comparison, like you said, that’s a really valuable piece of information that you can find, whether it’s articles or on the institution’s website. But what’s also interesting is there’s maximums for those initial balance thresholds, that may, cause the formula, if you will, not to apply to you. You may not be earning the promoted rate that you may see. In your findings have you found anything of that nature that you think would be advantageous for listeners to know?

Elizabeth Ayoola:

I haven’t come across that in particular, but I love that you brought up that point and it is definitely important to look at both minimums and maximums. So again, look at the fine print and that’s actually a good exercise for people considering opening a bank account. To write down these list of questions and feel free to call customer service or reach out to a chat bot to make sure you clarify and get all the questions answered before you open the account.

Cassidy Clement:

So my last question is really about the main things to keep in mind when you get to that finish line of investors or account holders saying, okay, it’s time for me to get that high yield savings account what are my main points? Like you were saying, if you’re going to pick up the phone tomorrow and call your bank or go into your bank, what are those main questions to ask?

Elizabeth Ayoola:

The main questions that you want to ask is first of all, which lures most people, what is the interest rate being offered? And not only what is the interest rate, but what are any of the strings attached to this interest rate? So in order to get this interest rate, do I have to have a minimum balance or like you mentioned, a maximum balance?

You also want to ask if the bank is FDIC insured so that in the worst case scenario that the bank goes bust, you know that you can recoup all, if not most of your money. You also want to look at the requirements for opening the account. What kind of hoops do you need to jump through and do you qualify for that account? And you also want to list out your banking needs before you make that call or write that email to customer service and ask whether they have all of the things that you need. So, as I mentioned earlier, that might be, being able to make cash deposits to the ATM. It might be in person customer service, if that’s important to you, access to ATMs, whether they reimburse fees, monthly transfer limits is another big one on high yield savings accounts, so how many monthly transfers can you make, and also the mobile app experience.

Cassidy Clement:

So the final piece that I would ask, about these like final questions for someone is when it comes to the compounding method of interest in these accounts, is there any additional questions that somebody should be asking on top of just reading what the potential compounding interest aspect is?

Elizabeth Ayoola:

Yeah, so every bank has a different compounding factor. So for some, it compounds monthly, for some it can be weekly. So you want to ask also how frequently your money is going to be compounding. For some, it may be, you know, it varies from bank to bank. So that might be an important piece to know as well. And again, if you want to know what that means for you financially, if you’re not math savvy, you can just pop that into a calculator because a calculator usually has an option to compound, you know, annually, monthly, and so forth.

Cassidy Clement:

Right. I think the compounding interest area sometimes doesn’t come across as an understood, or we’ll say more formulaic thing to some people who are just starting out. Maybe this is your percentage and they just run with it and that works. Where these interest timeframes may be different of how they get calculated and how it can impact your money and how it could actually be considered in your larger financial plan. You had also mentioned something in your answer here about links to other banks, wirings, ATMs. So how exactly would things like that impact the user? How important is that to understand?

Elizabeth Ayoola:

Oh, that’s super important. And that’s why again, it’s important to pay attention to and make a note of how your banking activities go ’cause it may be different for someone else. So for instance, if you are someone who travels a lot, you may need to use out of network ATMs. Is the bank going to reimburse you for that or are you going to end up paying a lot of out of pocket ATM fees? Someone like me, I make several transfers a month sometimes from my savings account. If, for example, the bank only has three a month in terms of the limit, then that means you’re stuck and you can’t transfer any money until next time month, right? So these are things that you wanna think about because essentially it could obstruct your finances, it could lead in worst case scenarios to things like late payments or again, excess fees, overdraft fees and things like that, which are basically taking away from your bottom line.

Cassidy Clement:

Yeah, that link to other banks or links to brokerage accounts, those are super important. If the money that you’re looking to use in this account is anticipated to be going elsewhere or could be tapped a lot earlier than you think. You had mentioned some of the withdrawal fees or withdrawal limits , those are really crucial points to look at when you’re comparing what structure or account works for you because nobody wants to wake up with an overdraft fee on something that they thought could be utilized at any time. It’s not a surprise anybody’s looking forward to, but you came here with a lot of great points and a lot of research, Elizabeth, so thanks for joining us.

Elizabeth Ayoola:

No, it was my pleasure. Thank you.

Cassidy Clement:

Of course, so as always, listeners can learn more about array of financial topics for free at interactivebrokers.com/campus. Leave us a rating or review on your favorite podcast network. Thanks for listening, everyone.

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