Everything to know about a high-yield savings account — why it’s a smart financial move

“The right time to open a high-yield savings account was yesterday.”
— Me (and probably many more people)

A high-yield savings account is a savings account that pays ~20x more in interest compared to the national average. While every bank offers a savings account, most do not offer a high-yield savings account. This blog post will cover the basics of banking, and explain why it’s a smart financial move to open a high-yield savings.

First, how does a bank make money?

When we deposit money to a bank, the bank loans and invests this money elsewhere. These loans and investments bring revenue and profit to the bank, and, as a result, the bank ends up making billions of dollars a year off of other peoples’ money. Given your money is stored in a savings account at the bank, the bank will then share with you a negligible fraction of the earnings they make with your money via interest. Money stored in a checking account, on the other hand, does not accrue any interest.

Second, what is the difference between a savings and checking account?

The main difference between a checking account and savings account, besides one accruing interest while the other does not, is that a checking account is an account that allows you to make infinite outgoing transactions via a debit card or checkbook. An outgoing transaction is a transaction that takes money out of your account (like when you buy some item). A savings account, on the other hand, is a bank account that (typically) limits you to a certain number of outgoing transactions per month. To spend money stored in a savings account, you are required to transfer money from your savings account to your checking account. If you make too many outgoing transactions from your savings account in a given month, the bank will usually convert your savings account to a checking account (Bank of America limits me to 6 transactions per month). The ultimate reason people open a savings account is to help budget their money.

What is an APY and how much is it?

The Annual Percentage Yield (APY) can be thought of interest earned over a year. The APY earned in a savings account provided by Bank of America, for example, ranges from 0.03% to 0.06% depending on your tier status at the bank. For instance, if you were to deposit $10,000 to a savings account with an APY of 0.03%, the balance of your account at the end of the year will be ~$10,003 — assuming that your balance remains constant at $10,000 throughout the year and depending on whether interest is paid out monthly or yearly. Regardless, the bank’s interest rate is minuscule compared to the current federal reserve interest rate, which is 1.75% at the time of writing. This means that the bank earns in the worst case 1.72% on our money if they were to lend the money directly to the federal reserve.

High-yield Savings Account options/details.

The alternative to storing money in a savings account at a bank is through financial platforms, such as Wealthfront, Betterment, Robinhood, Ally Bank, Marcus by Goldman Sachs, and more. These platforms offer high-yield savings accounts to encourage consumers to move money from large banks (Bank of America, Wells Fargo, Citi Bank, etc.) and deposit into their holdings. For example, at the time of writing:
- Wealthfront’s APY is 1.78%
- Betterment’s APY is 1.83%
- Robinhood’s APY is 1.80%
- Ally Bank’s APY is 1.60%
- Marcus’ APY is 1.70%.
These high-yield savings accounts also offer FDIC insurance. This means that if the platform were to go bankrupt, the government guarantees that you won’t lose any of your money up to the insurance amount.

How financial platforms make money and why they offer high-yield savings accounts?

You may be wondering how and why some of these financial platforms are offering an APY higher than the federal reserve. The answer to this is that they’re actually losing money, however, none of these platforms’ main form of revenue comes from offering a high-yield savings account. Their main form of business is being a platform to invest money in the stock market, where they either take a per transaction fee, a membership fee, or a fee on the total balance invested.

Regardless of the investment fee, almost none of these platforms require you to invest your money to get a free high-yield savings account — their business model is that when you’re ready and feel comfortable to invest your money in the stock market, you will use their services because you already have money in their platform (the high-yield savings account). Therefore, their mindset of offering competitive APYs is that it will attract more customers to their platform — possibly at a cost (if they offer APYs higher than the federal rate).

Why a high-yield savings account is better than a normal savings account.

Overall, by storing money in a high-yield savings account using one of the many financial platforms available, you are simply maximizing the accrued interest on your money. For instance, by storing $10,000 in a Wealthfront high-yield savings account over a Bank of America savings account, your savings account will accrue ~$178 in interest over a 1 year period compared to a meager $3 at Bank of America over the same time. This is ~60x more!

Even though inflation is ~3% a year, storing money in a high-yield savings account keeps your money liquid and mitigates the affects of inflation when compared to the low-interest savings accounts at large banks. This sole reason is why leveraging a high-yield savings account is crucial for liquid cash that you don’t expect to need or will invest in the near future.

The main downside to using these financial platforms is that you will have to wait ~1–2 business days to transfer money back to your bank’s checking account to spend, pay off your credit cards bills, or withdraw as cash. To counteract this, I personally tend to keep enough money in my checking/savings account at a large bank to pay off any bills or expenses I may face at a moment’s notice. Do note that some high-yield savings accounts offer debit cards, which may alleviate this downside and play a factor in your decision making of which platform is best for you.

There are many platforms that offer a high-yield savings account and each one has their pros and cons. Depending on your financial habits and needs some platforms may be better or worst for you. Here are a few articles describing the pros/cons of different high-yield savings account in 2020 that I used to pick my platform of choice:
https://www.businessinsider.com/high-yield-savings-ally-vs-marcus-vs-wealthfront
https://www.moneycrashers.com/best-high-yield-savings-accounts-interest-rates/

My high-yield savings account.

I ended up going with Wealthfront because it has no fees or minimum balance for high-yield savings account. Their automated investment strategy using Robo-investing is top notch and their investment fees are also as cheap as I’ve seen. Their fees are 0.25% a year on your portfolio balance, which equates to $0.25 per $100 invested (they claim this to be 1/4 of the industry average on their website). If you sign up for a Wealthfront account using the following promo code, Wealthfront will waive all stock market investing fees for the first $5,000 in your portfolio (remember that their high-yield savings account is free):
https://www.wealthfront.com/c/affiliates/invited/AFFD-BVB2-BYQJ-E73S.

In addition, Wealthfront also offers FDIC insurance in their high-yield savings accounts up to $1,000,000, which is 4x more than other high-yield savings accounts.

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Disclosure

*The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. This post is for entertainment purposes only.*

Written by

PhD student @ UC Santa Cruz | Security Engineer @ Looker

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