Why do only online banks offer this? If the rate is 6% and you put in 100k, then does it stay 6% for as long as you have the money in there….even if it’s years? How safe is this and why aren’t more people doing it.
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Online banks have less overhead — all those branches, employees in the branches are expensive! Typically the rates fluctuate in line with the Fed rate. Getting 6% is a new thing as rates have increases… a couple years ago you got maybe 2%.
ELI5 answer: They offer this because we have what’s known as a fractional banking system. They can lend 9x as much money as they have in deposits. So… if they can make 8% on a mortgage, then they’ll need to have at least 1/9 of that in assets. Thus, it works in their favor to offer good rates for deposits when they know they can make money by lending it back out.
> Why do only online banks offer this?
Online banks need to attract customers, and this is one way they do it. They tend to have less overhead and so can offer higher interest rates
> If the rate is 6% and you put in 100k, then does it stay 6% for as long as you have the money in there….even if it’s years?
No, rates can and do change over time.
> How safe is this and why aren’t more people doing it.
Perfectly safe as your money is FDIC insured. A lot of people do it, but 6% is a pretty bad rate of return. The S&P 500 has a 12 month total return of over 21%. And that interest has zero tax advantage so you are fully taxed on it.
> Why do only online banks offer this?
The branches operated by most banks cost a lot of money to run. Employees to pay, rent to pay, renovations to pay. And overall a branch is really just a place where customer service happens, all of the “banking” is done by computers at a head office. Online banks don’t have these costs, so they can offer different products.
> If the rate is 6% and you put in 100k, then does it stay 6% for as long as you have the money in there
No, most high interest savings accounts would be veriable rate. The bank would publish that they are paying and that’s what they pay right now. In the future, rates would change and so too would the rates on these savings accounts. There’s 2 exceptions.
First is a promotional rate. A bank is basically doing a sale where they guarantee X rate for Y time.
The second exception is when it’s not actually a high yearly savings account but rather a diffident type of investment. In Canada we use the terminality “GIC”, but I’m not sure if it’s the same in the US. The basic difference is that with a High Interest Savings account, you take your money out at any time. With a GIC it’s locked in for a set term (3 months, 6 months, a year ect). The rates on a GIC are normally better, but if you pull the money our before the term is up, you lose the interest. But in the case of a GIC, the rate is also locked in for that term. So you could go buy a 5 year GIC right now, get a decent interest rate, and keep that rate for the entire 5 year term.
> How safe is this and why aren’t more people doing it.
High interest savings accounts are generally federally insured up to whatever the maximum is, I think $250,000. So it’s pretty decently safe.
> why aren’t more people doing it.
Well, the answer here is 2 fold. First off, you’ve got to have money available to you in order to take advantage of a High Interest account. If you live a life of credit card debt, or some other paycheque to paycheque lifestyle then a high interest account does nothing for you.
The second answer is that you can generally get BETTER returns in a higher risk investment vehicle. A High Interest Savings account is extremally anti-risk. But if you invest in stocks or something like that you’ll likely do a lot better than 6%.
Of course, you could do worse as well, that’s the nature of risk. But if I told you that there’s a 50/50 shot with a particular investment. 50% of the time you’d get a 15% return, and 50% of the time you’d get no return (just get your money back). That averages to 7.5% and is a better return than a high interest savings account.
So not everyone does it because not everyone has the means, and those that do have the means might have better uses of that money.
A High Interest Savings Account is a really good place to keep something like an emergency fund. The money is not locked away incase you need it, it’s very safe and virtually risk free (so you won’t lose money), and if you need to transfer to your notmal account it happens very quickly. So it’s a nice place to keep money that you might need short notice access to.
On the other hand. Money that you might be OK with locking away for a few years (like a retirement fund, or home down payment savings). Or money that you won’t need 24/7 access to. the Stock Market is generally a better option. It might take a few days to sell stocks and withdraw money, but that’s fine as long as it’s not emergency money.
The “50/50 shot” comment is somewhat disingenuous, isn’t it? Getting no return isn’t the worst case scenario – getting completely wiped out is. Yeah it’s only 6% but won’t wake up one day and see it gone.
Soooo, besides HYSA what is a very low risk option for investing money that you are putting away for retirement???
>Why do only online banks offer this?
Because they can make more by lending out what you deposit, and furthermore because they can lend a certain amount more (x times as much) than they have in deposits.
>does it stay 6% for as long as you have the money in there
No. It’s based off current interest rates.
>How safe is this and why aren’t more people doing it.
I have no idea how prevalent it is, or how much people actually know about it. I do know most households live paycheck to paycheck, so that is going to cut down on it’s usefulness.
It’s as safe as any deposit. And in the US it’s insured with the FDIC, so as safe as the government existing I guess.
Answer: online banks have different liabilities that allow them to offer high yield savings. AFAIK, the percentage doesn’t not stay put. It is determined by the federal funds rate so it changes when the government changes their rates.
These are considered very safe because they are not market assets. They are more like loans where you’re the creditor to the bank and they pay you back at 6%. On top of that you get FDIC and SIPC protection.
Sooooo, if access to funds isn’t an issue, which is a better return in investment…. HYSA or CDs?
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