What's a High Yield Savings Account?

Breaking down how it works and why I have one

Sometimes it’s hard to be consistent, but really, that’s the whole challenge of consistency.
- me telling myself to write #TheLifeofJLOWE even when I’m swamped

Thanks for being here, happy Sunday & welcome back to another story from #TheLifeofJLOWE.

In the past week, I’ve been extremely swamped with studying, but I officially passed my FINRA Series 7 license exam and I’m actually proud to say that, because studying for that exam was no joke.

For those of you who don’t know, my side gig outside of writing this newsletter is working as a financial analyst in wealth management. The Series 7 is one of two licenses that I need to get in order to be a registered investment advisor with my firm.

As I was studying for my exam, and really in the past few months working in my job, I’ve been learning a lot about finance, especially in terms of how to build wealth as a young professional. In fact, I get asked quite a bit by my friends about how to manage money, and what I’ve learnt in my time doing wealth management.

In the spirit of my exam, I thought I’d share some general things that I’ve learnt in my journey of managing wealth, in the hopes that maybe someone out there reading this will maybe make a small change or take one step closer to achieving their financial goals.

For legal reasons, the following information is NOT financial advice, and you should not make investment decisions based on what I discuss. I’m also not speaking on behalf of my firm - all the views portrayed below are my own.

Most people don’t know what they’re doing

Before I get started, I wanted to get this one off my chest. As a former person-who-didn’t-know-what-I-was-doing in terms of managing my finances, this doesn’t come as a surprise to me, but something I’ve noticed working in wealth management is that a lot of people are in that boat of being financially illiterate. Most people really don’t have any experience with anything like investing in the stock market or worse, the bond market. (what’s a bond anyways haha? 👻)

Studying for this exam, I’ve realized that there are so many different ways to invest, to build wealth and to actually build habits that allow you to make a “mukkle out of a mikkle” (which is a Jamaican saying for making something big out of something small - we say “every mikkle mek a mukkle🇯🇲)

The thing about it is that the US financial system clearly wasn’t designed for everyone to have access to it, and worse, the education system wasn’t designed to even begin to provide access to it to those who didn’t have access.

Anyways, I say that to say that this is a safe space and I’m here to help. If there’s anything my job can teach me, it’s how to help others to make good financial choices, so let me do my best to give you a few tips to be more cognizant about your finances.

What’s a High Yield Savings Account?

Essentially, if you’ve opened a regular degular savings account with your bank, you’re probably making 0.01% interest on your savings. So basically, you’re making next to nothing. Why did I even open a savings account in the first place if my money was just gonna sit there and do nothing? 🤷🏻‍♂️😵‍💫 That’s the question I asked myself when I opened my high-yield savings account.

A high-yield savings account is an account that has a variable rate, and usually does well in periods of high interest rates. In a nutshell, the Federal Reserve has increased the discount rate dramatically in the past year. The discount rate is basically the rate at which the Federal bank lends money to other banks. They hiked that rate up to curb inflation (woah, financial terms 👹).

How does that work?

If they make it expensive for banks to borrow money, banks aren’t gonna want to borrow money. So what does the bank need to do? It needs to borrow less money, duh? How does it do that? By asking you to give them your money 🥰.

By increasing your savings rate (at a variable rate that’s tied to the Fed’s discount rate), you’ll be more incentivized to give them your money to hold on to, so that way they can borrow less since they have your money in their deposits. There’s a bit more that goes into it, but that’s the baseline argument for why a HYSA makes sense for financial institutions to offer.

Most high yield savings accounts are paying about 4.5% now, which is a whole lot compared to 0.01%, and really all you have to do is transfer your money to begin to earn the new rate.

As a disclaimer, you will have to file a tax return on the interest you make, so keep that in mind. Uncle Joe always gotta take his cut.

Marcus by Goldman Sachs High Yield Savings Account

If you’re interested in what I do - I currently have some savings in a Marcus by Goldman Sachs High Yield Savings Account. It’s currently paying 4.5%, but guess what, if you use my referral link - we can both earn 1% higher for 3 months, so that makes a nice 5.5% interest rate we’ll both get for a limited period.

The Caveat

The question I get when I pitch this to my friends is always “why doesn’t everyone do this?” or “what kind of scam is this?” or “how didn’t I know about this before?”

And guess what? I already told you, most people don’t know what they’re doing. To make matters worse, the financial system is intimidating, so when you hear of something like this it seems like there must be a catch.

The catch is something that’s actually in the description in plain English, which is that the rate is variable. Now you probably will still make more than 0.01%, but you also probably won’t make 4.5% on your money much longer. The Federal Reserve is in the process of holding rates constant (not increasing them anymore) because inflation is cooling. (“Inflation is cooling” = the average cost of all the things you buy is slowly coming back down. 🤸🏻‍♂️📉) Many financial analysts think that the Fed is gonna start cutting rates as soon as March/April.

Once that happens, you can reasonably expect your rate on your High Yield Savings Account to fall too. 😢

As I said though, you’ll probably still make more than 0.01%. 🤠

Conclusion

There’s a lot to be learnt in the financial industry, and everyone always wants to know where the best place to put their money is. Usually people are looking to either grow or protect their money, and to be honest, a high yield savings account is a pretty good way to do both.

I know this isn’t my usual kind of content, but I did want to take a dip into what it might look like if I use the experience from my day job to influence the content of my side hustle. If you found this content engaging, informative, easy to digest or useful in some way, give me some feedback on whether you want more tips or more finance-related posts, because that is what fills my brain from 9-5 on a day-to-day basis and I’m happy to share.

Leave a comment, send me a dm, like the post or share with a friend. It all means a lot to me - more than you know. And if you haven’t yet, make sure you subscribe!

Until next Sunday,
J

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