A high-yield savings account (HYSA) can be a safe place to store your cash in many different scenarios.
High-yield savings accounts offer above-average interest rates compared to . And unlike a , you can withdraw your money from a HYSA whenever you need access to the funds without being charged a penalty.
While a HYSA isn’t the perfect solution for every financial situation, there are many worthwhile uses for this type of account. Here’s how to use a high-yield savings account to your advantage if you’re considering opening one.
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How to use a high-interest savings account
In general, high-yield savings accounts offer higher (APYs) than traditional savings accounts. In July 2024, the average interest rate that banks offered their customers on savings accounts was 0.45%. There are now several high-yield savings accounts.
If you’re saving money for a short- or medium-term goal, a HYSA could be a great way to store your money. If you’re looking for inspiration, below are five smart ways to use a high-yield savings account.
1. Emergency fund
No matter how much money you make, it’s a good idea to create an emergency fund to be prepared for unexpected expenses or times of financial tightness. Many financial experts recommend setting aside at least six months’ worth of expenses in an emergency fund to have an adequate financial cushion.
Even if you can’t afford to put a lot of money aside yet, it’s OK to start where you can. As a bonus, using a high-interest savings account can help the money you save grow faster.
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2. Deposit
If you want to buy a new home or car, you’ll probably need to save up a down payment that will cover your loan. A large down payment can improve your chances of getting a loan, result in a lower monthly payment, and help you get a more attractive interest rate on your financing.
Of course, saving up money for a down payment can take some time. If you want to avoid paying PMI, it can cost as much as 20% of the loan amount (on a conventional loan). Many financial experts also recommend a 10% to 20% down payment on an auto loan.
3. Holiday fund
Instead of paying for your vacation expenses with a credit card, it’s wise to save up the money for your next vacation in advance. A high-interest savings account can be a good place to keep cash for an upcoming trip – especially if you can find an account with a low interest rate that will help your savings grow faster.
Once you’ve set aside enough money for your travel plans, you can easily offset those expenses to earn extra points, miles, or cash back. Just be sure not to go over your vacation budget. As long as you follow this rule, you can use the money you save up front to pay off your entire credit card balance and avoid debt and expensive interest fees.
4. Savings accounts for children
If you’re a parent looking to open a savings account for your child, a high-yield savings account is a good option. A good account should offer the same benefits as an adult savings account, including competitive interest rates and the security of your child’s savings.
Additionally, if you use a savings account as a tool for teaching your son or daughter, a HYSA can be a solid resource for hands-on learning.
5. Save for events
Whether you’re getting married, planning a retirement party, or celebrating another major milestone, you may need time to set aside the money needed to celebrate your upcoming event in style. You might be surprised to know that the average wedding costs about $35,000. And other large events can be costly, too.
Most people don’t have the cash to finance large events without adequate provision – at least not if they don’t want to go into debt in the process. So a high-interest savings account can be a great way to keep your cash while you put money away to afford these types of financial goals.
Frequently Asked Questions (FAQs)
Is it wise to invest money in a high-interest savings account?
A high-interest savings account at a bank (or credit union) can be a useful financial tool for many people.
If you are looking for a safe place to store your money while also getting a favorable interest rate, a HYSA could be a good fit for your situation.
However, keep in mind that a savings account may not be the best choice for long-term investment goals. For retirement planning and other long-term needs, consider where best to invest your money.
How much is $1,000 worth in a high-yield savings account?
The amount of interest you earn on a high-yield savings account (or any other deposit account) depends on several factors, including the annual percentage rate, interest frequency, and fees.
For example, let’s say you deposit $1,000 into a high-yield savings account with a 5% interest rate compounded daily. At the end of the year – assuming you make no further deposits – you would have earned $51.27 in interest.
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What are the disadvantages of using a high-interest savings account?
Despite their advantages, there are also some disadvantages to using high-yield savings accounts. First, HYSAs have variable interest rates. When the Federal Reserve adjusts interest rates, those changes can have a trickle-down effect on the APYs that banks and credit unions offer their customers on HYSAs and other deposit accounts. So if interest rates drop, your account balance could end up with a lower interest rate.
HYSAs also tend not to be a great fit for long-term savings goals, as the returns on these accounts have historically not been as competitive as market investments (such as stocks and bonds).
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