High Yield Savings Accounts
For the last few weeks, we've been talking about savings vehicles for minors. We've gone over Roth IRAs, 529 College Savings Plans, and UTMA accounts. If you missed those episodes, you can catch up anytime here.
Today, we're going to visit High Yield Savings Accounts. These are highly-liquid ways to tuck away money you might need in the near future, or money you just don't feel comfortable risking in the stock market. We'll go over some of the companies that offer the best rates right now, how you can maximize your liquid savings with regular intention, and how these can be great opportunities for minors to learn about saving, while still having access to their precious piggy bank money.
Are you ready? Let's get started.
What is a High-Yield savings account anyway? Is it just a fancy savings account?
Well, sort of. A high-yield savings account (HYSA) is a special type of savings account that typically pays 20 to 25 times the national average of a standard savings account. Now, a standard savings account is only paying 0.04% annual yield on average (That's four-hundredths of one percent), which means if you have $1,000 in the bank, you'll earn $4 interest annually. So it doesn't exactly take much to beat that. A HYSA will give you typically 0.30-0.50%, which means that $1,000 will earn you $30-50 annual interest. Way better than the measly $4. But still, with stock market averages 6.8% over the last 50 years, adjusted for inflation, these tiny pieces of a percent still feel small. It's hard to justify putting an enormous amount of money in an account that earns so little, but there are some useful strategies for keeping money in a savings account, especially a HYSA. We'll go over these shortly.
But first, I want to give you a quick run-down of some of the companies where you can find these elusive deals and earn more on your savings than four-hundredths of a percent.
Best Banks Today
As of today, Axos Bank is beating the field with a 0.61% Annual Percentage Yield (APY), with several runners up in the 50s:
Vio Bank
Live Oak Bank
Alliant Credit Union,
Comenity Direct
Quontic Bank
CIBC Bank USA
Ally Bank
Citibank
Marcus by Goldman Sachs
Salem Five Direct
TAB Bank
TIAA Bank
Popular Direct
Some of these may be smaller, local banks, and therefore won't help you if you don't live in their state or region. Some may be annuity insurance companies, so it's important to check it out before you sign up.
These rates change all the time, so when you're reading this, the banks I mentioned may not be at the top of the heap. Do your homework before you decide which bank to use. Factors such as location, minimum balance requirement, number of deposits and withdrawals per month, and maximum FDIC insurance will all play a part in helping you decide which institution is best for you.
So why would people want to put their money where it won't be earning a whole lot?
There are lots of reasons to keep liquid cash in an account like this. Some examples might be a rainy-day fund, which everyone should have, by the way. You should always have 3-6 months of bills and expenses in an account that you hold away from your spending accounts. It must be accessible, which means you can't buy long term treasury bonds with that money, in case you need it right away for an emergency. A HYSA is perfect for this balance of money because you probably won't need it, but you never know, so you want it to grow at least a little while it's sitting there keeping you protected from not being able to pay your mortgage in the event you lose or your job or you become unable to work.
Another reason to keep cash in a HYSA instead of someplace else is that you can demonstrate to your kids and/or grandkids how important it is to save, keep money available for emergencies, and have a little slush fund off to the side that's earning interest even while it's completely available to you when you need it.
What if your child is going to college in a couple years? Maybe a 529 isn't worth it to you, but you need to be intentional about saving to prepare for this big expense? Well, automatic transfers are absolutely possible with some of these banks, so you can set it and forget it. And if you pick one that doesn't offer automatic transfers, then you can set a reminder in your smart phone to write a check to that account and deposit it using your mobile banking app at regular intervals to help keep you on track to save for college.
If you have minors in your house, you can open an account for them, and show them that you're putting money in it every month. Or take their allowance and make it grow a little bit. It's not a lot of growth, but when they want to save up for a special item they've been wanting, they can access the money when they've saved enough, and all the while, they earned a little interest for saving their pennies. I love savings thermometers, posted boldly on the fridge, to help your child visualize a goal they're working towards. Try to make the goal short and attainable for younger kids. It's important that it's an age appropriate time frame so they don't lose interest or get discouraged when it seems to take forever to save up for their goal or special treat. I recommend 4 weeks for children under 10, 2-3 months for children under 14, and 4-6 months for high schoolers. Stretching out the timeline as they grow will help build their habits for when they have rent or a mortgage or a car payment to worry about. It won't be completely foreign to them to pay or deposit monthly over time. Everybody's situation is a little bit different, so if you have questions, reach out to your professional financial planner and ask them what the best strategy would be for your individual circumstances.
Quick story about saving ahead
I used to teach flat water kayaking classes at the county Parks and Rec department when I was in college. I would collect everyone's keys before we went out on the water, and put them in a dry bag, since so many of them have a battery inside and can't get wet. I noticed an extremely nice brand of car on one of the participants' keyrings, and I complimented her on her excellent choice in luxury cars. She told me, she's never had a car loan in her life, and that every car she's ever purchased has been with cash. I marveled at this concept, since I was still wet behind the ears and young enough to not have a clue about long-term savings. She told me that her grandfather had given her the first car she ever drove, but had then required that she make payments to him every month, as though there were a loan on the car. He kept it in a savings account for her, and when she had enough for a new car, she used the cash to purchase the car without a loan. Then, she started making payments towards her next car in the same fashion. Since the money was being saved ahead of time, she earned interest on it instead of paying interest. It's a concept I have carried forward on large purchases ever since, and I'm grateful that she took the time to share this savings tool with me.
While there are reasons why a young adult might want a car payment, like building a strong credit history through regular payments, if this isn't going to be an issue for your child or grandchild, my kayaking student's strategy might be a real game changer to teach your children that saving ahead of the need is the best way to do it. Saving for a down payment on a house is a similar exercise in diligence, one which could be placed in a HYSA for the duration of the saving timeframe until you're ready to make that big purchase.
So as you can see, there are so many reasons why HYSAs are really great, even though they pay tiny amounts of interest! I hope you'll consider opening a HYSA for you or your minor to stash your emergency fund, car fund, vacation fund, pretty much any chunk of money you might need in the near term that you still want to earn a little interest on. Showing your children and grandchildren that diligent saving is possible and easy is one of the biggest gifts you can ever give them.
Keep saving, and have a great day!