You probably know you should build retirement savings in your 401(k) or IRA and that you should keep your day-to-day cash flow in your checking account. But, where should you stash cash you’re saving for shorter-term goals?
This cash needs to be accessible, but you don’t want it idling in your checking account earning nothing. I mean, you want to make your money work for you, right?
The solution you’re looking for is a high-yield savings account.
These are simply online savings accounts that pay high interest rates – typically much higher than what’s available through traditional banks. This is because online banks don’t have the same overhead expenses as their brick and mortar counterparts.
Besides paying attractive rates, high-yield savings accounts are flexible, risk-free, and usually don’t carry monthly fees. In almost every case, you get the same FDIC protections you’d get at a traditional bank, too.
Still not sure exactly how you’d use a high-yield savings account? Here are six reasons you might want to open one today!
Build an Emergency Fund
If you don’t have an emergency fund yet, building one should be your savings priority. It’s important to have a financial cushion to fall back on in case an unexpected expense comes up. Think things like car repairs or a pricey dental bill.
Need help starting an efund? One easy way to do it is to use a strategy called “sinking funds.”
Simply, set up an automatic transfer between your checking account and your high-yield savings account for a set amount each month. Scheduling that transfer each payday is a smart way to go – that way, you don’t miss the money. Some employers will also let you split your paycheck, so you don’t even have to schedule a transfer.
A high-yield savings account is the perfect place to house your emergency fund because it’s 100% accessible if you need it, and the extra interest helps it grow faster. Aim to build up $1,000 to start and later set a goal of three-six month’s expenses.
Stash Cash for a Vacation
Once you have an emergency fund in place, you can start saving for more exciting financial goals – like taking a vacation!
Build your vacation fund in a high-yield savings account the same way you do your emergency fund. Automate the transaction and sit back and watch your dream vacation become a possibility.
Currently, our favorite place to stash your cash is with CIT Bank. Their Savings Builder Account offers a 2.45% APY, which is huge.
To get started, open a CIT Bank Savings Builder Account here.
Save for a Down Payment
It isn’t right for everyone, but if homeownership is one of your goals, you’ll need to save for a down payment. Typically, that’s 5% to 20% of the purchase price.
Most people aren’t comfortable assuming much risk when it comes to saving for a down payment on a home, since they usually want to buy within five years. That means investing in the market is likely out. They also tend to need cash readily accessible in case they happen upon an incredible deal, so a CD might not be the way to go, either.
High-yield savings accounts are a good option because they’re risk-free and insured by the FDIC or NCUA. While you likely won’t see the kind of returns you might see in the market, you’ll still earn some interest and rest easy knowing your down payment is safe.
Save for a Car
I recommend buying used cars and paying cash whenever possible. New vehicles depreciate rapidly and are more likely to be financed. Never finance anything except a house with a modest mortgage – debt sucks!
If you can manage to pay cash for a decent used car, you can begin a cycle of paying cash for cars for the rest of your life. Never having a car payment again sounds amazing, am I right?
To get the ball rolling, you need to save up the cash for that first debt-free car purchase. A high-yield savings account is the perfect tool to help you do it. Automate a regular transfer to your “car account” until you have enough to go shopping, and then make sure you shop smart.
The key to remaining payment-free is to continue stashing money in your high-yield savings account even after you’ve bought your car. Pretend you have a car payment, but instead of paying a lender, pay yourself! That way, when your good used car eventually bites the dust, you’ll have the cash to buy another.
If you’re currently financing a car, you need to pay it off (or sell it) first. Once you’re payment-free, continue making the payment, but redirect the money to your high-yield savings account instead. You’ll never have to finance again.
Build a Social/Gift Fund
Not every goal needs to be huge. A high-yield savings account is great for storing some fun money, too.
Most people build regular social activities like date nights into their budgets (or they should, anyway!), but what about social expenses that only come up occasionally? I’m talking weddings, baby showers, and friends’ birthday parties.
When these events come up, it’s nice to be able to celebrate guilt-free without blowing your budget. If you have a high-yield savings account earmarked for fun money, you don’t have to worry.
To determine how much you should stash for social events, you have two options. If you’ve been tracking your spending for a while, it shouldn’t be too much work to review last year’s expenditures and come up with a number.
If you haven’t been tracking your spending, you should start, but you can estimate the amount you’d like to have available. Divide that figure by 26 and start directing your mad money to your high-yield savings account every payday.
Prepare for the Holidays
The holidays can be a stressful time of year for a lot of folks, mostly because gifts, decorations, food, wine, and all the other expenses can add up…big time.
Wouldn’t it be awesome when November (or let’s be real, December) rolled around, you didn’t have to budget all your holiday expenses from a couple of paychecks?
Here’s what I suggest: Right after the holidays, take stock of everything you spent. Divide that figure by 26 – that’s how much you want to budget out of every paycheck for your holiday spending.
Can you guess what’s coming? That’s right – automate a transfer to your high-yield savings account every payday. Those funds will accumulate and grow all year, and when next holiday season rolls around, you’ll be set.
A high-yield savings account is a flexible, easy-to-use tool that can help you reach your short-term savings goals.
Whether you’re getting started with an emergency fund or saving for your next vacation, a high-yield savings account is a good place to store (and grow) your money. If you don’t have one yet, I recommend doing something about that. In fact, I like having one for each of my savings goals.
Thanks so much for reading, and don’t forget to check out our CIT Bank Savings Builder review here!
Do you currently have a high-yield savings account? If so, how do you use it? Let us know in the comments!