How Much Money Should I Put in My High-Yield Savings Account?

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A high-yield savings account allows you to earn interest while you save—a win-win scenario. But how much money you put into a high-yield savings account will depend on your personal savings goals and financial situation.

High-yield savings accounts function similarly to traditional savings accounts, except that the annual percentage yield (APY) is greater. The APY on savings accounts averaged 0.05% as of December 2020, according to the Federal Deposit Insurance Corporation. Rates on high-yield savings accounts have taken a hit during the COVID-19 crisis, but still come in higher than those of traditional accounts.

As with traditional savings accounts, you'll likely be limited in how many withdrawals and transfers you can make from a high-yield account each month. You'll also owe income taxes on the interest you earn. Still, these accounts can be quite useful for growing an emergency fund or saving money for a big, short-term expense (such as a vacation or wedding).

Because your savings goals are unique, the amount you should put into a high-yield savings account is as well. But there are ways to calculate that number for yourself.

What Is the Recommended Amount to Put in a High-Yield Savings Account?

There are a couple of factors to consider when funding your high-yield savings account. One is your purpose for saving, and the other is your savings goal—the balance amount you want to reach. Common uses for these accounts include building emergency savings or paying for a short-term expense.

Emergency fund: Your emergency fund should be able to cover three to six months' worth of expenses. The goal is to be able to afford essential expenses—rent or mortgage, utilities, groceries, prescriptions, debts—if you lose your income due to a layoff or illness, for instance.

It's a good idea to keep your emergency fund in a savings account you can easily access, as opposed to investing it in a longer-term vehicle such as a mutual fund, so you can withdraw cash immediately without risking financial loss.

Short-term expenses: If you're saving for a significant, near-term expense, a high-yield savings account can be a great place to put those deposits until you need the cash. Your savings will earn money, and you'll still have access to it when the time comes to make a big purchase or payment. Saving for a down payment on a house, paying for a wedding, taking a big vacation or renovating your house are all candidates for a high-yield savings account.

Once you've determined why you're opening the account, you can figure out how much you should put into it. To figure out your emergency fund goal, tally up your monthly essential expenses and then multiply them by three or six to get your number.

That calculation is just a guideline, though. You can set the amount of your emergency fund goal to any number that works for you. If you're a seasonal worker, you may want to save more than six months of expenses, as a buffer against any volatility in your line of work.

If you're currently living paycheck to paycheck, saving up three months of your total expenses may feel like an overwhelming goal. In that case, focus on making small deposits. Additionally, trimming even one or two discretionary expenses from your budget and putting that money toward your savings can help create financial stability. If you put it into a high-yield account, you'll see an even better return.

Assuming that you're saving for a short-term expense, calculate how much you need to set aside. If it's a vacation or wedding, you can list all of the associated costs and use the sum of those as your target. Or, if you're saving for a house, you can use your homebuying budget to set your goal. Maybe you want to buy a house in the $300,000 range with 10% down, which means you'd need $30,000 in savings.

There is no magic number for your high-yield savings account. It all depends on what you're trying to achieve and what aligns with your income.

What to Look for in a High-Yield Savings Account

Before choosing a high-yield savings account, you may want to compare options from a few different banks (both traditional and online). Here are some details to look for:

  • Interest rate: The first question to ask about a high-yield savings account is what is the APY. In the past, many have offered interest rates of up to 2% or greater, though APYs have dropped significantly during the pandemic. Keep in mind that APY rates can fluctuate, so you may not earn the same amount at all times.
  • Opening deposit: Some banks require a minimum deposit to open the account or to earn the maximum APY available.
  • Fees: These might include funds transfer fees, excessive withdrawal fees and monthly maintenance charges.
  • Withdrawal restrictions: Banks often limit the number of withdrawals you can make each month, so it's important to find out how often you can take out cash. You'll also want to find out whether you'll be charged for going over the withdrawal limit.
  • Deposits and withdrawals: It's a good idea to find out whether you can make withdrawals from an ATM or by transferring money to a checking account, and whether there are any limitations on how much you can take out at one time. You may also want to look into whether the account can be accessed through a mobile app and whether mobile check deposit is available.

As you consider these factors, also think through whether a high-yield savings account is right for you in the first place. You might conclude that the yield you'd get isn't worth the hassle of shifting your savings to a new account, or that a high-yield account isn't the best place to put your money after all. Before making any major adjustments to your personal finances, decide whether it's worth it to you.

Alternatives to a High-Yield Savings Account

Although high-yield savings accounts can be great for emergency funds and short-term goals, they're not always the best option for longer-term priorities. Here are some alternatives when you're thinking several years or decades down the road:

  • Certificate of deposit (CD): A CD account is similar to a high-yield savings account in that you earn a higher interest rate than you would with a traditional savings account. With a CD, you'll likely get an even better rate than you would with a high-yield account, but you agree not to withdraw money for a set period of time (anywhere from six months to several years).
  • Money market account: Money market accounts function a lot like high-yield savings accounts, but they allow you to write checks and make withdrawals from ATMs. Money market accounts may require you to maintain a minimum balance each month, so you'll need to factor that into your budget.
  • 401(k): A 401(k) is a retirement investing plan you may be eligible for through your employer. You can contribute to your 401(k) each month, or out of each paycheck, and your employer may match your contributions up to a certain percentage. You can technically take a loan from your 401(k), but that's not typically a wise move due to potential financial penalties and negative effects on your retirement saving progress.
  • Individual retirement account (IRA): You can set up an IRA independently rather than through your employer, but it works similarly to a 401(k). An IRA allows you to put a certain amount of money each year into your investment account to earn interest for your retirement expenses. Depending on the type of IRA you choose, you may be able to limit your tax liability now or in the future based on how you expect your income to change. Note that you may be charged penalty fees if you withdraw funds before age 59½.

The Right Account for the Right Goal

There are a lot of great savings options out there. The key is to choose accounts based on your goals. You're likely not going to use the same account to save for retirement as you do for buying a house, and that's OK. The important thing is to maximize your savings within a certain timeframe so you can fund your goals—and what those goals are, and how much money you need for them, is entirely up to you.

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