What a high-yield savings account is and how to open one this weekend

Your checking account is paying you 0.01% on $10,000. That is one dollar a year. A high-yield savings account (HYSA) at a competitive online bank is currently paying somewhere between 3.8% and 4.4%, which on the same $10,000 works out to roughly $380 to $440 a year for doing absolutely nothing. The gap is not a reward for financial sophistication. It is a tax you pay for inertia, and it takes about twenty minutes on a Saturday to stop paying it.

What an HYSA actually is

A high-yield savings account is a regular FDIC-insured savings account — same $250,000 insurance per depositor, per bank — that happens to pay a competitive interest rate because the bank offering it does not have to fund a network of physical branches. That is the entire trick. Ally, Marcus, Wealthfront, SoFi, Capital One 360, Discover — these institutions all pay meaningfully more than Chase or Bank of America for the same product because their overhead is a website and a call center instead of 4,000 storefronts with tellers and lease payments.

The rate is variable. When the Federal Reserve raises or cuts its target rate, HYSAs move within a few weeks. That is worth knowing because the marketing copy will imply the rate is a feature of the bank; it is really a feature of the macro environment. In 2021 these same accounts were paying 0.5%. In 2019 they were paying 2%. Right now they are paying around 4%. Do not fall in love with a specific bank because of a specific number.

Three names worth opening this weekend, all paying in a similar band as of this writing:

• Ally Bank. No minimums, no monthly fees, decent app, transfers to external accounts take one to three business days. The interface has not changed much in a decade, which is a compliment.
• Marcus by Goldman Sachs. Also no minimums or fees. Rate is often a hair below Ally's, sometimes a hair above. The app is thinner but the account works.
• Wealthfront Cash Account. Technically a cash management account (it sweeps your money to partner banks), not a savings account, but FDIC-insured up to $8 million through the sweep and often the highest advertised rate of the three. Faster transfers via their instant withdrawal feature.

I am not linking to referral codes. Pick one. The difference between 4.0% and 4.2% on $10,000 is $20 a year, which is less than the cost of debating it for a week.

The transfer setup nobody explains

Here is what actually happens when you open one. You go to the website, give them your name, address, Social Security number, and date of birth. They run an identity check against a database (usually ChexSystems), which takes seconds. Then they ask you to link your existing checking account. You can do this two ways:

The first is instant verification, where you type your Chase or whatever login into a Plaid window and it connects immediately. The second is micro-deposits: they send two deposits of like $0.07 and $0.13 to your checking account over one or two business days, and you come back and confirm the amounts. Use whichever you are comfortable with. Plaid is fine; it is what most fintechs use.

Once the external account is linked, you initiate an ACH transfer from checking into your new HYSA. First transfers are often capped for fraud reasons — Ally, for example, may hold larger initial deposits for up to five business days before the money is available. The money is earning interest during the hold. It is just not withdrawable yet.

Set up an automatic transfer for the day after payday. Not payday itself — the day after, so you know the deposit cleared. Even $200 a month, moved before you see it in checking, is how the first $10,000 gets built. The mechanic that makes this work is not discipline. It is that the money is not sitting where you spend from.

How this differs from a money-market fund

This is where people get confused, because banks use the phrase "money market" for two different things.

A money-market deposit account (MMDA) is a savings account with check-writing privileges. It is FDIC-insured. It usually pays a rate similar to an HYSA, sometimes slightly lower. Functionally, for your purposes, it is a savings account.

A money-market fund (MMF) is a completely different product. It is a mutual fund — you buy shares of it inside a brokerage account at Fidelity, Vanguard, Schwab, etc. It is not FDIC-insured. It is invested in short-term Treasury bills and commercial paper. Its yield is usually 20 to 50 basis points higher than an HYSA because you are taking on a small amount of market risk (small — money-market funds have "broken the buck" essentially twice in history, in 1994 and 2008, and holders were made mostly whole both times).

For your emergency fund and your first $10,000, an HYSA is the right tool. It is boring, insured, and accessible in one business day. A money-market fund at Fidelity (SPAXX) or Vanguard (VMFXX) is a reasonable choice if you already have a brokerage account and want an extra $30-50 a year on $10,000. It is not worth opening a brokerage account for. It is worth using if you already have one.

Closing the old savings account

If you have a legacy savings account at your primary bank paying 0.01%, close it after your HYSA is funded. The bank will try to talk you out of it, because deposits are their raw material — they lend your $10,000 out at 7% and pay you 0.01%, and they would like to keep doing that. When you call, they will offer a "relationship rate" or ask about your goals. Skip it:

"Hi, I want to close my savings account ending in 4432. I have already moved the balance out. Please close the account and mail me written confirmation. I do not need to hear about other products today, thank you."

That is the entire call. Ninety seconds. If they insist on transferring you to a retention specialist, you can wait or hang up and try again — the account can also often be closed via secure message in the app.

Pick one of the three banks above, open an account before you close this tab, and set up a $50 transfer from checking to hit next Friday. You can raise the amount later. The point is to have the pipe built before the weekend ends.