What is the best high-yield savings account (HYSA)?
The average annual percentage yield (APY) for traditional brick-and-mortar bank savings accounts is currently around 0.10%, while top-performing online HYSAs can offer over 3.50% APY – over 35 times higher.
The lack of physical branch infrastructure and lower operational costs allow online-only banks to pass on significantly higher interest rates to their HYSA customers compared to traditional banks.
HYSA rates closely track the Federal Reserve's benchmark federal funds rate, so they tend to rise and fall in tandem with changes in monetary policy aimed at controlling inflation.
Online HYSAs do not require a minimum balance to earn the advertised APY, unlike many traditional banks that impose monthly fees or reduced interest rates if the balance drops below a certain threshold.
Besides the APY, top-rated HYSAs often offer features like seamless mobile app integration, the ability to easily set up multiple sub-accounts, and nationwide ATM access – benefits that traditional banks may not provide.
The FDIC insurance limit of $250,000 per depositor, per insured bank applies to HYSAs just as it does for regular savings accounts, ensuring the safety of deposits up to that amount.
HYSAs typically have no monthly maintenance fees, while traditional bank savings accounts often charge $5-$15 per month unless customers meet certain balance or activity requirements.
Online banks can offer HYSAs with no minimum opening deposit, allowing consumers to start earning high interest rates immediately, even with small initial balances.
The interest earned on HYSAs is compounded daily, which means the account holder earns interest on their interest, leading to faster growth of their savings.
Unlike investments in the stock market, the interest earned on HYSAs is considered ordinary income and is subject to federal and state income taxes.
Online banks can update HYSA interest rates almost instantly in response to changes in the federal funds rate, while traditional banks may be slower to adjust their rates.
HYSAs provide a safe and liquid alternative to holding cash in a low-yielding checking account, making them a popular choice for emergency funds, short-term savings goals, and excess cash management.
The top-performing HYSAs are often offered by lesser-known online banks or financial technology companies, rather than the largest national brick-and-mortar banks.
HYSA interest rates can vary significantly across different banks, so it's important for consumers to shop around and compare offers to find the best rate for their savings needs.
Unlike certificates of deposit (CDs), HYSAs do not have a fixed term or early withdrawal penalties, allowing customers to access their money at any time without incurring fees.
The high level of competition in the online banking space has led to a steady increase in HYSA interest rates over the past few years, with rates more than doubling since 2020.
Customers can easily transfer funds between their HYSA and other linked bank accounts, facilitating the management of their overall personal finances.
While HYSAs are considered a low-risk investment, they do not provide the same level of growth potential as more volatile assets like stocks or cryptocurrencies.
The rise of digital-only banking has made HYSAs more accessible to a wider range of consumers, including those who may not have easy access to traditional brick-and-mortar bank branches.
Regular contributions to a HYSA can significantly accelerate the growth of an individual's emergency fund or other short-term savings goals, thanks to the power of compounding interest.