When it comes to stashing your extra money, you have a number of account options to choose from. For starters, regular savings accounts are widely available, but with average interest rates of 0.43%, the returns on these accounts aren’t keeping up with inflation. As such, they aren’t necessarily the best option right now.
Another option to consider is a certificate of deposit (CD), which offers an average APY that is much higher than a regular savings account. In fact, there are numerous options offering well above 5% currently — but the downside is that you have to lock away your money in the account for a certain amount of time or face penalties that eat into your returns.
High-yield savings accounts are yet another one. And a high-yield savings account isn’t just a place to keep the money you put away for a rainy day. These accounts, when used correctly, can be a secret weapon for savvy savers and investors because they offer a unique blend of safety, liquidity and high returns. But how can you make the most of this financial tool?
5 best ways to use a high-yield savings account
If you want to get the most from your high-yield savings account, you may want to consider the following uses.
The first, and perhaps most crucial, use of a high-yield savings account is as the foundation for youremergency fund. An emergency fund acts as a financial safety net, protecting you from unexpected expenses like medical bills, car repairs or sudden job loss. Experts recommend saving at least three to six months’ worth of living expenses in your emergency fund, and a high-yield savings account is the ideal place to park this cash.
Why choose a high-yield savings account for your emergency fund? Because it offers both safety and liquidity. Your money is safe from market fluctuations, and you can access it quickly when needed. Plus, the higher interest rate ensures your emergency fund grows over time, helping you keep pace with inflation. Explore your top account options for your emergency fund here.
Short-term savings goals
Saving for short-term goals, such as a vacation, a down payment on a house or a new car, is another excellent use for a high-yield savings account. Unlike investing in stocks or bonds, which carry more risk and volatility, a high-yield savings account allows you to earn a competitive interest rate without risking your principal.
It may benefit you to set up separate high-yield savings accounts for each of your short-term goals. This way, you can track your progress and avoid dipping into funds earmarked for one goal to finance another while still taking advantage of the high interest rate you can earn on each account.
Storing funds for small emergencies
While your primary emergency fund should be kept in a high-yield savings account, consider setting up a secondary account for smaller, more frequent emergencies. This secondary fund can cover minor expenses like a broken phone or a sudden pet illness. By segregating these funds, you prevent depleting your main emergency fund for non-urgent needs, helping it grow faster.
An opportunity fund is a savings account designed to capitalize on investment opportunities when they arise. This could include purchasing stocks during a market dip, investing in a business venture or taking advantage of a real estate deal.
While these opportunities may be less frequent than other financial goals, having a dedicated high-yield savings account for this purpose can help you act swiftly when they do arise.
Saving for irregular expenses
Many of us face irregular expenses throughout the year, such as insurance premiums, property taxes or annual subscription renewals. Instead of being caught off guard when these bills come due, use a high-yield savings account to save a little each month.
This approach smooths out the financial impact of these irregular expenses and ensures you have the funds ready when needed.
The bottom line
A high-yield savings account is not just a place to park your money; it’s a powerful financial tool that can help you build wealth, achieve your goals and navigate unexpected financial challenges. By using your high-yield savings account strategically for emergency funds, short-term goals, opportunity funds and irregular expenses, you can make the most of this versatile financial asset.