There’s no secret that high-yield savings accounts are one of the best places to save your money temporarily. They’re FDIC insured, your money is highly liquid, and they can earn you over 20x the national average for savings deposits.
However, high-yield savings accounts aren’t the best place to store your money all of the time, especially not long-term.
Instead, you should be capitalizing on higher returns by investing your money. Even if you don’t want to invest your money in the stock market, there are dozens of other high-return alternatives investments you can use, such as investing in bonds and REITs.
Needless to say, there is still a time and a place for high-yield savings accounts. Today, you will learn about the best uses for a high-yield savings account and when it’s appropriate to use one.
Let’s get started.
1. Down payment on a home
Conventional mortgages usually require at least a 5% down payment. And putting anything less than 20% down will require you to get private mortgage insurance (PMI), which is a cost that you can avoid if you put down 20% or more.
You can also take out an FHA loan, which only requires a down payment of at least 3.5%. FHA loans also have lower credit score requirements, starting at around 500.
Even still, let’s say you put down 5% on a $200,000 home, that means you’ll need to save up $10,000 to secure the mortgage. For most people, even on a below-average income, if you really desire to purchase a home, you can save $10,000 in under three years, conservatively. If you have the right system in place, you can save $10,000 significantly faster.
Having the right system in place starts with opening a high-yield savings account. By doing so, you can take advantage of the high-interest rates offered by these accounts, effectively saving your money faster.
Let’s take a look at some examples using sample numbers on a $200,000 home and how long it would take you to save money for a down payment.
- 20% down payment for a $200,000 home would take about three years of saving if you saved $1,110 every month for three years
- 5% down payment for a $200,000 home would take about one year of saving if you saved $833 every month for one year
- 3.5% down payment for a $200,000 home would take about six months of saving if you saved $1,166 every month for one year
As we mentioned before, these are just examples. If you’re motivated to save quicker, you might be able to save in half the amount of time.
2. Emergency fund
There are dozens of reasons why you should have an emergency fund. And yet, only 18% of Americans say they could live off their emergency savings for at least six months. That means a massive 82% of Americans either don’t have an emergency fund or have a small emergency fund not adequate for major emergencies.
A high-yield savings account is one of the best places to store your emergency fund if you are going to start one. Unlike a traditional savings account, which only earns you between 0.01% and 0.06% APY, a high-yield savings account can earn you as much as 2.00% APY.
This high interest is great because it gives your money a layer of protection against inflation, which bounces between 2–3% annually. Additionally, high-yield savings accounts operate the same way traditional savings accounts do, which means no surprises.
You are free to withdraw your money at any point without paying a fee or penalty, a maximum of six times per month. Your money is also FDIC insured up to $250,000.
3. Wedding fund
TheKnot surveyed over 27,000 couples who got married and found that the average cost of a wedding is $33,900. This cost includes things like:
- Reception venue
- Wedding cake
Keep in mind that this is simply the average. Does it mean you will spend $34,000 on your wedding? Absolutely not. There are many places you can cut wedding costs.
For example, is it necessary to pay a DJ $1,200, or could you get away with connecting your phone to a loudspeaker? Do you absolutely need a florist, or is there someone in your family who can get the job done for free?
These are the questions you should take into consideration to cut back on unnecessary wedding costs. However, the point remains—you can never be over-prepared, especially when it comes to you or your child’s special day. For this reason, you should be saving up for a wedding fund.
When you are saving money for this special occasion, it’s best to save it in a high-yield savings account where it can earn interest over time. The interest you earn certainly won’t be a fortune, but it’s far better than the interest you’d earn on a traditional savings account.
This especially becomes true if you are saving money for longer than a year. Because the interest you earn in a high-yield savings account compounds, you’ll continuously earn more and more over time. You’ll be earning interest on top of your interest.
Take the mystery out of growing & managing your money
Join the MayoFinance newsletter to stay connected and level-up your money mindset.
4. Family vacation
Figuring out how you’re going to pay for a family vacation is the least fun part of the process. But, like with any big financial decision in life, you’ve got to have a plan. That plan should start with opening and utilizing a high-yield savings account.
Using a high-yield savings account to save up for a family vacation is great for two primary reasons. Let’s briefly go over both.
For starters, if it’s hasn’t been emphasized enough already, when you open a high-yield savings account, you’ll earn higher interest on your savings. This will help speed up your family vacation savings, especially if the trip is happening soon.
The next benefit may come as a surprise. When you open a high-yield savings account, it won’t likely be at your current bank or credit union. Instead, it will have to be at a separate bank, which means the savings account will be separate from your checking account.
This may appear like an inconvenience at first. However, you’ll soon realize that having your family’s vacation savings separated from your checking account will keep you from putting your hands in the cookie jar, so to say.
5. Buying a new vehicle
Whether you’re buying a new car or a used one, you’ll need to make a down payment—unless you are buying it with cash. Traditionally, banks require a 20% down payment to secure an auto loan. However, according to an Edmunds analysis, the average car loan down payment comes out to about 11.7%.
Let’s put this into perspective with an example. Say you want to buy a brand new car for $35,000, and you intend to put down 11.7%. This means you’ll need to put down $2,991 before taxes and fees.
Now, this certainly isn’t a substantial amount of money, but it’s not a walk in the park either. For most Americans, who don’t have more than $500 in savings, this can be a daunting task. However, by planning and setting up the right system, you should save the money in no time.
Starting with the right foundation is key. We recommend you open a high-yield savings account and keep your new car savings separate from your checking account. This will prevent any “accidental” withdrawals from your savings.
Alternatively, if you need help automating your savings, you can utilize apps like Qapital. Qapital is a banking app designed to help you save more money without having to change your lifestyle. Read our Qapital review to learn more about the app if you are interested.
6. Last-minute college savings
If you’re a proactive planner, you probably have a college savings plan such as a 529 plan or Roth IRA. But even if you don’t, there’s no need to worry. It’s never too late to start saving money for a last-minute college savings fund.
Traditionally, we recommend starting a college fund in a 529 plan or, our favorite, a Roth IRA. However, this only applies to parents whose kids have several years left until they head off to college.
What’s great about starting a college savings in a Roth IRA is that you can take advantage of the various investment options, such as stock and bond ETFs. You have time on your side, so you can watch your fund grow exponentially over the years thanks to the high returns from your investments.
However, if your kid only has a couple of years until college, then you should avoid putting their college fund in the stock market or any other investment for that matter. In your situation, one of the best places to house this fund is in a high-yield savings account.
A high-yield savings account will still give you a much higher-than-average return on your savings. It will also protect you from any market volatility and inflation, which is the last thing you want when your kid is so close to graduation.
7. Self-employed tax account
If you’re a freelancer, gig worker, or independent contractor, you will benefit from opening a self-employed tax account. These are accounts that you deposit money into throughout the tax year to prevent yourself from facing a giant tax bill in April.
Essentially, every time a client pays an invoice, you estimate how much of that income you’d owe to the IRS. You then take that money and stash it into the tax account.
Unlike W-2 employees, who usually have taxes deducted directly from their paychecks, freelancers and independent contractors don’t. This means come April, instead of getting a refund check, you’d have to send a check to the IRS with the back taxes you owe.
Whether you have a self-employed tax account or not, a high-yield savings account is the best place to store your tax money throughout the year. You can ensure that your money is safe and won’t be affected by any market changes. The last thing you want to do is put your tax money into the stock market or any type of investment and lose it.
High-yield savings account aren’t best for every situation. For example, building your wealth through investing should be done in a brokerage account where you have access to various investment options.
However, there are many great uses for a high-yield savings account. If you are not taking advantage of these accounts somewhere in your financial life, you are missing out on a lot of benefits.
Opening a high-yield savings account takes minutes. Most major banks offer these accounts, and you can be open one quickly online. You have nothing to lose and much to gain. High-yield savings accounts are FDIC insured, highly liquid, and offer much higher interest than traditional savings accounts. So, what are you waiting for?