One of Dave Ramsey’s Baby Steps for building wealth is to build up an Emergency Savings Fund or as I like to call it, your “Oh Sh*t! Fund”. I don’t agree with everything Dave Ramsey says, but I do agree that it absolutely makes sense to build up savings for emergencies or to save for a future large purchase like a new couch or a vacation. That way, you can avoid going into debt by putting things on a credit card that you can’t immediately pay off.

If you have read any of my previous finance related articles such as WTF is a TSP: The Beginner’s Guide to Crushing Military Retirement or Traditional vs Roth TSP then you know I don’t believe in letting your money sit idle. Whenever possible, you should always work to use the power of compound interest to let your money work to earn even MORE money while it’s sitting somewhere.

Investment accounts such as the Thrift Savings Plan or an IRA can provide excellent rates of returns on your investment but with the stipulation that you can’t touch that money for decades without paying steep penalties. This won’t work for an “Oh Sh*t! Fund” because you need easy access to the money in the event of an emergency. So what are your other options?

• You could put all your money under your mattress… it would be super secure, but you won’t earn a penny in interest.
• You could try putting it in a traditional bank savings account… and earn a whopping .01% interest.
• You could try investing it in a money market account… you’d get a higher rate of return, but have to meet whatever minimum deposit amount is required (anywhere from $1K to $25k).
• You could put it in a short-term Certificate of Deposit (CD)… CD’s are offering up to 2.55% APY, but then you lose access to the money for the duration of the CD term (anywhere from 12 months to 5 years).
• You could even try your luck investing it in the stock market… but that is way too risky and you’d have to physically sell off your stocks if you needed the money in a pinch.

No. What you REALLY need is a low-risk way to earn a decent rate of return on your savings while still having easy access to the money; without any restrictions on when you can withdraw it or the requirement to maintain a minimum balance.

Enter the High Yield Savings Account.

Bottom Line Up Front

High Yield Savings accounts are a little-known (but much better) alternative to traditional savings and money market accounts. Typically offered by “online only” banks, their average rate of return (ROI) is approximately 190x HIGHER than the average ROI of a brick-and-mortar bank traditional savings account (between 1.7 – 2.25% APY); you have easy access to your money, and there are often zero initial deposit or minimum balance requirements. They provide the best of all the options list above: Good rate of return, zero risk, easy access, no fees, and no restrictions.

Amplifying Information

To further drive the point home, here is a picture of the average savings account interest rates for 2018, compared across banks. You’ll see that that average APY for brick and mortar banks is a mere .01%. One of the banks even makes you maintain a $2,500 balance for the “privilege” of earning .02% interest! Conversely, the circled internet-only banks offer a staggering 1.9% APY with no minimum balance!

This chart should make you want to vomit in your mouth a little bit

I can see your mental wheels turning right now. You’re wondering, “How can these internet banks offer such high interest rates? What’s the catch!?” Well, you doubting Thomas you, you’ll be happy to know there is no catch! Also, I wouldn’t write an article about it if there was a catch ;-).

The reason internet banks can offer 190x more interest is that they don’t have to spend money building thousands of branches and hiring people to fill them. They also want to compete for your business. The only drawback is convenience:

To access your money, it will take between two and three days for your money to transfer from your “internet bank” high-yield savings account to your “big bank” checking account; whereas you get instant access, and lots of ATMs, with big brick-and-mortar banks like Chase and Wells Fargo (but a TERRIBLE interest rate). Big banks are counting on you being lazy.

Pretty Pictures

Words are great, but if you are like me, you are a visual learner and you need pretty pictures and charts to really grasp a concept. Your wish is my demand. Let’s head on over to Dinkytown.net (stupid name, amazing calculators) and use their handy financial calculators to see how these interest rates actually affect your savings over time.

For easy math, let’s see what happens to $5,000, with no additional deposits, after 12 months under your mattress (0% APY), in a traditional savings account (~0.01% APY), and in a high yield savings account (~1.9% APY).

• After an entire year, you earned exactly zero dollars in interest with a traditional savings account compared to $95 in interest with the high yield option.

Now let’s see what happens to that same $5,000 after three years with an additional deposit of $150 each month.

• After three years you’ve saved an additional $5,400 and earned a paltry $2 in interest with a traditional savings account (don’t spend it all in one place!) compared to $450 in interest with the high yield option.

Where do I sign up?

There are a lot of options. The three most popular are Ally, Synchrony, and American Express. I personally use American Express because if you’ve read any of my articles on their credit cards, you know that I am a huge fan of their customer service and their support to active duty military. Here you can find a list of the best High Yield Savings account options for November 2018.

That’s it

Hopefully, by now, I’ve convinced you that a) saving is important and b) parking your money in a traditional savings account is practically useless, and you are now interested in switching to a High Yield Savings account.

If you found this information helpful, please share it on your social media outlet of choice, and subscribe to my email list to receive more articles like this delivered straight to your inbox. If there is something that I missed or something that didn’t make sense, please comment below and I’ll get right back to you.

Whether you take my advice or decide you’d rather put your money in a CD; just please, for the love of God, don’t leave your money sitting in a USAA traditional savings account for 5 years.

You’re Welcome