How would you like your savings to earn 20 to 25 times more interest than traditional savings accounts?
Got your attention? I thought so. Let’s say you have $5,000 in bank savings. The national average is 0.10 percent APY (annual percentage yield). You get $5 in return after a year. Instead, if you deposit that same $5,000 in an account earning 2 percent, you earn $100 after the same period.
This is what you call a High Yield Online Savings Account (HYOSA).
1. What is a high-yield online savings account? –
A high yield online savings account (HYOSA) is a type of online deposit that you make in a virtual bank. They give high-interest rates on your deposit, typically 0.5 percent on the low end. There are super HYOSA that yield 5% interest rates. HYOSAs have better returns than a normal savings account, and checking account.
A regular savings account only gives 0.09% interest a year. That’s according to the Federal Deposit Insurance Corporation (FDIC). This is not even enough to keep up with the inflation rate which is forecast to be 0.62% by this year.
Online banks can give higher yields on deposits because they have lower overheads. No buildings, physical banks, tellers, cashiers, and physical security. They can pass on their low operating costs to their clients.
Online banks also need more clients. They are specialists in fintech so they offer fewer monetary products than a traditional bank. Online banks focus more on providing online financial services to their clients.
Below is a comparison between Discover, an online bank, and the other big banks which you are familiar.
As you can see, just for the various fees alone that big banks charge, you can actually shrink your savings rather than grow them. Never mind the interest yield.
2. Is your money stuck in an online savings account?
You can access your HYOSA anytime that you need it. Normally, you only keep money that you won’t need in high-yield savings accounts but with HYOSA, you can deposit even your living expense budget and withdraw up to the point that you need them.
HYOSAs are not like Certificate of Deposits (CDs) or time deposits. CDs give you high interest on the condition that you park your money with the bank for a certain period, usually a year. During this period your theme song would be You Can’t Touch This by MC Hammer. This is because you can’t withdraw your savings until the agreed period is over. If you do then, you forfeit the supposed interest and pay steep early termination fees.
With traditional banks, you have to go over the counter or to an ATM to do any transaction. At best you will have to flop open a laptop to go to your bank’s website. With a virtual bank, you can just use their smartphone app to conduct your business.
HYOSAs allow you to transfer, deposit, or withdraw from your account anytime while still enjoying the high-interest rates.
3. Who has the highest online savings account?
As of this writing, these are the online banks that offer HYOSA.
| Bank | APY | Minimum Opening Deposit | Maintaining balance | Maintenance fee | Remarks |
Aspiration | Up to 1.0% | $10 | None | None | Get up to 5% cashback on socially conscious spending. Your deposits won’t fund fossil fuel projects like pipelines, oil drilling, and coal mines. |
Chime | 0.5% | None | None | None | No overdraft. No minimum balance. No monthly fees. No foreign transaction fees. |
Discover | 0.5% | None | None | None | Easy 3-step account opening. Great customer service. |
Marcus | 1.05% | None | None | None | Fixed-rate, no fee personal loan. unsecured personal loans from $3,500 to $30,000 |
Axos | Up to 1.25% | None | None | None | Checking account up to 1.5% APY. Interest compounded daily. No monthly maintenance fees. No minimum balance requirements. |
Varo | Up to 2.80% | None | None | None | Get 2.80% APY if you:Make at least five qualifying Varo Bank Visa® Debit Card purchases ANDReceive qualifying total direct deposits of $1,000 or mor |
Nbkc | 0.4% | None | None | None | Savings and checking account into one. Reimburses up to $12 for out-of-network ATM fees. |
Quontic | 0.65% | $100 | Yes | None | Bitcoin Rewards Checking 1.5% in bitcoin for debit card purchases |
Salem Five Direct | $100 | none | none | none | Salem Five Direct doesn’t charge monthly fees or out-of-network ATM fees. It also reimburses fees that other banks charge up to $15 per statement cycle. |
Simple | 0.5% | None | None | None | With its Safe-to-Spend tool, for example, you input your monthly bills and expenses and Simple automatically sets aside the necessary funds. |
Ally | 0.5% | None | None | None | reimburses up to $10 per statement cycle for fees charged to out-of-network ATMs. |
Charles Swab | 0.5% | None | None | None | Unlimited ATM fee rebates worldwide. Check deposit from anywhere. |
American Express High Yield Savings Account | 0.05% | None | None | None | No ATMs or checks |
Synchrony | 0.60% | None | $100 | None | Lock in your rate with a $2k minimum deposit |
Vio | 0.57% | $100 | None | None | Offers both a High-Yield Online Savings account and CDs. |
Digital Federal Credit Union | Up to 6.17% | $5.00 | None | None | Earn up to 6.17% APY if you maintain your balance above $1,000 |
Do keep in mind that interest rates are determined by market factors and regulations. Interest rates change all the time. Please be sure to check the bank’s website.
4. Can you lose money in a HYOSA?
Nope, your money is covered by insurance. First, it is insured for up to $250,000 by the Federal Deposit Insurance Corp. (FDIC). High-yield savings accounts offer a safe place to stash cash while earning interest.
Second, aside from the FDIC which insures many virtual banks, the National Credit Union Administration (NCUA) insures nationally chartered, and many state-chartered, credit unions (per depositor, per institution, per ownership category).
Third, most online banks are affiliated with brick-and-mortar banks that are FDIC insured. And some offer additional insurance protections through organizations like the Massachusetts Depositors Insurance Fund (DIF).
Before opening an account, make sure that the bank you are interested in is covered by the FDIC, and the NCUA if it is a credit union.
Online savings accounts have tons of digital paper trails. There are redundant systems and various process checks that happen in the blink of an eye. Avoiding hard copies removes opportunities for fraud and human error. This way online savings accounts are very safe.
5. How much interest will I get on $1000 a year in a savings account?
At a 0.5% interest rate, a HYOSA with $1000 will get $5 in a year. That’s a good return for the money that you won’t be missing.
The best savings yield as of January 2021 is the 6.17 percent introductory APY (if you keep your balance above $1,000) from Digital Federal Credit Union. Ally Bank offers 1.75 percent on an 18-month certificate of deposit and 1.5 percent for savings. By comparison, Chase offers 0.1 percent APY for its 18-month CD and 0.01 for its savings account. $1,000 will bring $50. $10,000 will bring $500. $50,000 will bring $2,500. $100,000 bring $5,000.
Discover Bank’s online APY calculator
6. How do I choose a HYOSA?
1. Reputation
Research the virtual bank’s reputation. There are consumer customer groups who give their feedback on banking institutions. Go on Reddit and Quora to ask for feedback. There’s also Glassdoor.com, Investopedia.com, Bankrate.com, and other similar websites. It is important to do your own research and analysis based on what you need. Talk to friends, or even lawyers, for legal, financial, and practical advice.
2. Customer service
Remember that virtual banks don’t have a physical presence where you can go to do your transaction. This means you have to ensure that they have top-notch customer service. Again, there are websites where you can dig up the facts about companies. Better yet find out from someone who has first-hand experience.
3. Interest rate
Interest rate just only comes out third in our list of things to be concerned about. The APY on savings accounts is dependent on prevailing market forces. Look at the history of the bank and not just their present rates. Look for a virtual bank that offers rates that don’t fluctuate too much. Savings accounts are not like CDs where the interest rate is locked for the agreed period.
5. Savings cap
Some HYOSAs have a cap on how much money you can put into your account so be aware of this. Find out how many accounts you can open under your name. Be mindful also of all the other fees like maintaining balance, monthly maintenance fees, outside network ATM fees, and other charges that will eat into your savings.
6. Compound interest
Aside from APY, another thing that will determine how fast your savings will grow is compound interest. In simplest terms, it is “interest on interest.” Both the interest on the principal and the accumulated interest are calculated. Compounded interest will make your savings grow much faster than simple interest can. Simple interest is calculated only from the principal.
Another determining factor is that compound interest accrues faster based on how frequent the compounding is done by the bank. The higher the frequency, the greater the compound interest. A savings of $100 compounded semi-annually at 5% will bring a much higher yield than the same $100 compounded annually at 10%. Over time this interest-on-interest effect will snowball even larger. That’s why it’s also called the “miracle of compound interest.” It’s one reason why the rich get richer.
Conclusion
Virtual banks have been a boon to millions of financially disadvantaged people. Access to finances and savings has never been easier for those who need it the most. Virtual banks’ high interest on savings put pressure on traditional banks to hike their interest rates on savings too.
Do your homework before putting your egg in one basket. Better yet, put your money in several virtual banks to try them out. Online banking is convenient because it is so easy to move your money around. It also takes only a few clicks to open a bank account. Do so until you find the right bank for you. The best time to get a HYOSA is now. The more you wait the more you are losing money.