Why You Need A High-Yield Savings Account

I was going to write about horses, and then I was inspired to write about high-yield savings accounts. Will be giving another tour of my brain from 1 to 1:15pm tomorrow.

We’ve all heard the depressing statistic that ~39% of Americans aren’t able to cover an unexpected $400 expense — it seems mentioned in nearly every personal finance article next to how millennials will never own homes because we buy too much avocado toast and Starbucks (don’t start with me on this). Inflation also surged to a 40-year high in June 2022.

So what does that have to do with a high-yield savings account (henceforth referred to as an HYSA)? I’m not here to lecture you about why you should be saving or budgeting, but we can get to that. I’m here to explain why you need an HYSA.

This spur-of-the-moment post came after discussing saving with one of my friends and realizing that they’re not as prevalent as I thought! As a quick reminder, banks pay interest in exchange for “using” your funds to loan to other creditors. This rate is normally called an APY (annual percentage yield) and is the rate earned on an account over a year — including compound interest. Compound interest is the key to maximizing the great APY you have! As your account grows, your interest is paid on that balance as well, so your money is working for you. HYSAs are true to their name — they pay more interest than other bank accounts, are liquid, just like a checking account, and you can withdraw from them at any time and are FDIC insured. Most don’t require minimum deposits or automatic transfers, and tbh, in today’s economy, that’s highway robbery if your bank is trying to make you do that. You don’t have to put the funds in anything, it takes a few minutes to set up, and you can set up direct deposits.

Inflation also comes into play here — to slow inflation, the Fed has raised interest rates, which does raise mortgage and credit card interest rates, but also raises interest rates on bank accounts. I survived months of 0.4% interest rates on my Ally bank account, which is now up to 3.30%, which is a huge difference! Yes, eggs may be an arm and a leg, but at least your savings account can pay out the equivalent of a dozen each month in interest.

My current setup is Ally bank — an online bank with no physical locations or ATMs. I have been thrilled with the service over the past 5 years but the best feature (even better than the APY and customer service!) is the bucket feature. You can split your account into up to 10 buckets and assign goals and due dates. You are still paid interest on your full account, but I love being able to assign money to different buckets and see where each stand. I have one for Christmas gifts, one for yearly bills, one for vacations — you get the picture. It’s what I would do in my budget, but it’s done for me through Ally. I also always send some of my paychecks straight to my savings account so that I don’t a) see it and b) have to go transfer it back to my bank account which adds friction to the process.

In short — open an HYSA, pay yourself first, and make that money!

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