Do I need a High Yield Savings Account (HYSA)?

Someone you know has probably shared with you that they have earned 4%, 5.125%, or more in their High Yield Savings Account (HYSA). They have probably even offered to send you a link to join. An HYSA can be a great way to save for short-term emergencies but I would not recommend an HYSA for long-term savings.

Why SHOULDN'T I use a HYSA for long-term savings?

1. Most HYSAs have account requirements in order to earn the advertised interest rate. These requirements include but are not limited to, Direct Deposit, Minimum Balance, and the number of days in the month the minimum balance must be maintained. Some even have a minimum number of referrals required to keep the High Yield every month.

2. The rate you get is based on the Fed Rate (Federal Reserve) and it can change as the Fed lowers or raises rates. Usually, banks can only offer a higher rate when the Fed rate is high. What if the Fed decides not to change rates for a longer period of time than expected? You might see your HYSA actually go down. Remember, when you put your money in the HYSA (at a generous 4% interest), that bank is lending YOUR money out at double, even triple that rate for mortgages, HELOCs, car loans, and credit cards. With interest rates continuing to climb, consumers will pull back and stop borrowing. That could lead to banks not having a customer base to lend money to creating less incentive to offer you more on your deposits.

3. The real rate of return might surprise you. Not to bore you with financial equations but I want to be sure you have enough facts to make an informed decision. Though the offer APR looks appealing, let's calculate your actual return; your REAL return.

Real Rate of Return = [(1 + nominal rate)/(1 + inflation rate)] - 1

Let's say the advertised rate from the HYSA is 5% and the inflation rate is 3%

Real rate of return = [(1 + 0.05)/(1 + 0.03)] - 1

(Calculators are approved for this class)

Real Rate of return = 0.019417 = 1.94%

Was that worth it? YIKES!

You could say that's better than nothing.

Why SHOULD I have a High Yield Savings Account?

1. The yield you will get on a HYSA is better than a regular savings account. Most savings accounts will yield less than 1% interest (go ahead and look at what your current bank is offering, I'll wait).

Did you find it? I bet it wasn't really easy to find either. Yeah, they hide those little numbers . . .

When you keep your money in a regular savings or checking account, you are actually losing money. Don't believe me?

Let's do the math again. Calculators UP!

Real Rate of Return Equation using a 1% yield (which is generous) and our current rate of inflation.

Real Rate of Return = [(1 + 0.01)/(1 + 0.03)]-1

Real Rate of Return = -0.01942 = -1.94%

You actually lose money by leaving it in the bank (That does not mean take it out of the bank and hide it in the mattress!)

2. Another reason you should use a HYSA, is because some have a required amount of time that the money must remain in the account to receive the high yield rate, you may be less inclined to make withdrawals which would allow your money to continue to grow and meet your savings goals. Many HYSA accounts also do not come with a debit card so you actually have to wait 1 - 3 business days for the money to transfer to your spending account before you can use it. That also gives you some time to reconsider whether you're really having a financial emergency or not.

3. Finally, your money gets the same FDIC protection or more because typically HYSAs are with institutions that have less overhead and can afford to offer more protection against a loss, so why not? I've seen some institutions offering more than $250,000 in FDIC protection.

High Yield Savings Accounts can be a good tool in building a healthy Financial Strategy but it's just one of many. Be sure of the requirements to earn the high yield and be sure of your purpose for using this kind of account. I recommend using an HYSA when you are saving for short-term emergencies; things like replacing flat tires, saving for senior year fees for your child, funds to pay your auto insurance, or home warranty deductibles.

Keyona Hargett is the owner and founder of FireWater Group, LLC a Small Business Consulting and Bookkeeping Firm. She is also a Personal Financial Coach and licensed Life Insurance Producer, pursuing the coveted Certificate of Financial Planning (CFP). She has over 20 years of experience as a Financial Analyst for Small Businesses, nonprofits, and the Department of Defense. When she is not crunching numbers, she teaches Zumba Fitness, STRONG Nation and is a powerhouse vocalist in the Washington, D.C. Metropolitan area.

For Financial Health Coaching, Contact Keyona at admin@firewatergroupllc.com or schedule an introductory meeting: https://calendly.com/firewatergroup/financial-health-introduction-meeting