2The only thing scarier than getting coal in your stocking is… not having your money in a high-interest savings account [insert referral link here]! Right up there with using an MVNO for your cell phone service, having a high-interest (or “high-yield”) savings account is one of the easiest, most straightforward, no-brainer ways to make your money work for YOU. High-yield savings accounts are also…
The Only Good Thing About Rising Interest Rates!
As we’re all painfully aware, we’re currently experiencing the joys of inflation. Woohoo, aren’t we the lucky ones! As the Federal Reserve tries to tamp down inflation, one of their most frequently used tactics is raising interest rates. This is bad news bears if you’re borrowing money, such as for a new mortgage. But this is good news giraffes if you put your money in a high-interest savings account because, as the Feds raise interest rates, the interest rates on these savings accounts also go up!
Let’s say you have $10,000 in your savings account. If you use an account without an interest rate, in one year your $10,000 will still be… $10,000. However, if you instead put your $10,000 into a high-yield savings account, such as the American Express® Personal Savings account, your $10,000 will earn interest every year. That means you make money just by having your money in a high-yield account. And you didn’t have to do anything!
[INSERT AMEX WIDGET HERE]
When Should I Use A High-Yield Savings Account?
Anytime, all the time, every time!
The real question here is how much money should I keep in a savings account VERSUS investing that money in something else that could potentially earn more interest/appreciate over time? This is a nuanced question and something I address in almost every on-the-blog Reader Case Study and in almost every private financial consultation I conduct. So let’s dig in!
There’s a hierarchy of what to do with your money and, for the vast majority of folks, it looks like this:
- Save up an emergency fund of three to six months’ worth of your spending.
- This is your buffer against debt and it’s an imperative part of everyone’s financial health.
- This is also a reason why it’s crucial to track your spending. You need to know how much you spend each month in order to know how big your emergency fund should be. If you need a way to track your spending, I use and recommend the free tracking software from Personal Capital (affiliate link).
- Your emergency fund should be kept in an easily-accessible account, such as a checking or high-interest savings account. It shouldn’t be tied up in illiquid assets, such as houses/cars/antique china OR the stock market. You should be able to withdraw the funds immediately and at any time. That’s why it’s called an “emergency fund”–it’s there to make emergencies easier.
- Part of this exercise is also to ensure that you’re cash flowing your expenses every month and not spending more than you earn.
- Pay off all high-interest debt.
- Anything with a high interest rate should be paid off as quickly as you’re able since you’re losing money to interest. Things like car loans, student loans, credit cards, etc are all included here.
- Something with a low, fixed interest rate (such as a mortgage) isn’t included because paying off low, fixed-rate debt represents an opportunity cost. When you do that, you prevent your money from doing something more profitable, such as growing in the stock market. If you tie your money up in paying off a mortgage early, you’re losing out on potential gains from other investments.
- Invest for your retirement.
- If your employer offers a 401k/403b/457 or other retirement account, it’s usually best (and easiest) to start there. Particularly if your employer matches your contributions–that’s free money and definitely something to take advantage of!
- Before delving into any other types of investing, you want to ensure you’re on track for retirement, which is calibrated on how old you are and when you anticipate retiring. An easy rule-of-thumb to follow comes from Fidelity: “Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.”
- If your employer doesn’t offer an account–or you’d like to invest more–you can explore the many other retirement vehicles available: Roth IRAs, regular IRAs, SEP IRAs, solo 401ks, and more!
- Whatever you do–whether you’re self-employed, working at an enormous company, or one of three employees at a tiny firm–there’s a retirement plan that’ll work for you.
- Optional: Explore other investment options.
- If you’ve completed steps 1-3 and are ready for more, you can start researching the world of investment options. There are many different ways to invest, but many folks–myself included–choose the standard options of real estate and the stock market.
- To learn more about how to wisely invest in the market, I highly recommend the book The Simple Path to Wealth by JL Collins (affiliate link). The essence of Collins’ book (and the way that I invest) is to look for a brokerage that offers total market low-fee index funds.
- In a total market index fund, you’re essentially invested in a teensy bit of every single company in the stock market, which gives you a ton of diversity. If one company or sector tanks, your entire portfolio isn’t toast. It’s the “not putting all of your eggs in one basket” version of investing.
- Low fees are crucial because high fees will eat away at your money over time. Before you start investing, be certain that you know what an expense ratio is and what YOUR expense ratio is.
- Wondering how to find a fund’s expense ratio? Check out the tutorial in this Case Study.
- For reference, the following three brokerages offer DIY low-fee investment options:
- Fidelity’s Total Market Index Fund (FSKAX) has an expense ratio of 0.015%
- Charles Schwab’s Total Market Index Fund (SWTSX) has an expense ratio of 0.03%
- Vanguard’s Total Market Index Fund (VTSAX) has an expense ratio of 0.04%
- Optional: Invest for your children’s higher education.
- Next on our tour of the financial hierarchy is saving for your children’s higher education. This is most commonly done through a 529 college savings account.
- The reason this is last on the list is simple: it’s a “put your own oxygen mask on first” scenario.
- While you want to provide for your children, you must provide for your own retirement. Kids can take out loans for school, but you cannot take out loans for retirement. I always advise parents to first ensure they’re on track for their own retirement, then contribute to a 529 account.
- The situation you want to avoid is that you pay for your kids’ college and then have to move in with them in your old age because you didn’t save enough for retirement.
- Ongoing: Rebalance, check-in, scan for new investment opportunities.
- Put yourself on a schedule of checking in on all of the above:
- Is your emergency fund staying in line with your spending?
- Are you still on track for retirement?
- Have any debts cropped up that need to be paid down?
- While it’s a linear list, it’s also one you need to continually loop through because life happens and things change.
- If you’re invested in the stock market–through retirement, taxable investments, 529s, etc–you’ll want to rebalance your portfolio on a regular basis and ensure that your investments match your plans, your age, and your personal risk tolerance.
- Put yourself on a schedule of checking in on all of the above:
How Does This Relate To Savings Accounts?
Oh right! Savings accounts! A savings account is where you want to park:
- Your emergency fund.
- Savings for specific, large, near-term purchases such as: a new car, a new home, a new roof, etc.
- If you anticipate needing to purchase something major in the near-term (say, the next five years or so), you want to have the cash for that readily available.
- The reason you DON’T want to invest this money in the stock market is that the stock market is unpredictable. The market goes up and down–that’s what it’s supposed to do–and the way you weather those fluctuations effectively is with time.
- If you remain invested in the market for a long time, historical stock market returns show that you’re likely to enjoy a 7% annual return on your investments. However, this does NOT mean you’ll make 7% every single year. One year you might lose money and the next you might lose money and then the third year, you might experience a double digit return.
- Given the mercurial nature of the market, you don’t want to invest money you anticipate needing anytime soon because it might lose value.
- When people say they “lost it all in the market,” what they’re referring to is selling stocks at a loss. As long as you don’t sell when the market’s down, you won’t lock in those losses. Instead, you’ll continue to ride the wave of the market back up.
For folks with a big purchase on the horizon, using a high-yield savings account is even more important [insert referral link here]. The more money you have, the more impactful the interest rate. For example: if you have $75,000 saved for a downpayment on a home you hope to buy in the next few years, and you put it into a high-yield savings account that earns 3% in interest, that’s $2,250 per year!
[INSERT AMEX WIDGET HERE]
Granted, the interest rate on a savings account isn’t fixed–which means it can fluctuate up and down–but still, even if you only earned that high interest for a short period of time, it’s way better than earning nothing! Since savings accounts aren’t inherently risky in the way that stocks are, there’s no reason not to choose an account with a high interest rate.
High-Yield Savings Accounts to Choose From
Here’s a list of high-yield savings accounts [insert referral link here] and their current interest rate offerings, which as I noted, aren’t fixed and can change over time (affiliate link). Utilizing one of these accounts is an easy, low-risk, straightforward way to make your money work for you!