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A high-yield savings account (HYSA) is similar to a traditional savings account except that it earns a substantially higher interest rate. Higher yields make HYSAs an excellent option to help you reach short-term savings goals. Consequently, the amount of money you should put in your high-yield savings account depends on how you plan to use the money.
Here's what you need to know to determine the right savings amount for your financial goals and maximize the benefits of a high-yield savings account.
How Much Money to Put in a High-Yield Savings Account
There's no strict rule about how much money you must deposit in your high-yield savings account. Your target savings amount depends on your savings goals and other factors unique to your personal financial situation.
Here are some common savings goals, along with example target amounts for each:
Emergency Fund: 3 to 6 Months of Living Expenses
A common rule of thumb is to build an emergency fund with enough money to cover three to six months' worth of necessary expenses should you lose your income, suffer a serious illness or experience an emergency. Having an easily accessible cash fund available can help you pay for essential expenses, like rent or mortgage, utilities, groceries, medical expenses and other costs.
If you want a six-month emergency fund, you'll need to multiply the average cost of your basic monthly expenses by six to calculate how much money you'll need to save. For example, let's say your average monthly expenses are $3,000, including your rent, utilities, food, gas and other essentials. In this case, you should aim for an $18,000 emergency fund to cover your bills for six months.
If you typically have strong job prospects, or if your partner's income is enough to sustain both of you in a financial emergency, a three-month emergency fund may be adequate.
Home Down Payment: 20% of Home Price
For many, buying a home is a major financial goal that generally requires saving for a down payment. The amount you'll need to save depends on several factors, including the home's price and the type of mortgage you plan to get.
If you plan on using a conventional mortgage to finance the home, putting down at least 20% can start you off with more equity and save you on interest charges over the life of the loan. If your goal is to save $100,000, how much you add to your HYSA each month will depend on your budget. If you can swing adding $2,778 each month, you'll hit your target in three years ($2,778 x 36 months = $100,008). Similarly, if your budget has room to save about $833 each month, you'll save nearly $100,000 in 10 years ($833 x 120 months = $99,960).
Of course, $100,000 is a significant sum that can be challenging for some to save. Some conventional mortgages and government-backed loan programs allow for down payments of less than 20% or even no down payment options, but you'll have to pay mortgage insurance. FHA home loans allow down payments as low as 3.5%, which means your down payment on a $500,000 home would only have to be $17,500. Remember, however, your monthly mortgage payment, including mortgage insurance, would be considerably higher.
Vacation: Full Cost of Trip
High-yield savings accounts are also a safe place to save money for your next vacation while earning greater yields. According to NextVacay, the average cost of a domestic vacation is $1,550 for one person, while international trips average $2,300. Of course, vacation costs can vary widely based on your destination, when you travel, transportation and other factors.
To determine your vacation savings goal, calculate your costs for transportation, lodging, food and activities. Follow these guidelines to get a general idea of the costs of a domestic vacation.
- Lodging: $129 per night for single-occupancy or $259 per night for a double-occupancy hotel room
- Transportation: $46 per person, per day for local transportation or $189 for travel between cities
- Food: $58 per day, per traveler
- Tours: $385 per day
Depending on your destination, international vacations may cost more or less than domestic getaways, so adjust your budget numbers accordingly. While flights tend to be more expensive, restaurant costs are often only slightly more, if at all.
Once you determine your vacation costs, divide your target savings goal by the number of months before you depart. For example, if your estimated costs for your dream family vacation are $9,000, and you plan to hit the road in one year, you should set aside $750 per month in your HYSA ($750 x 12 months = $9,000).
Car Down Payment: 10% or 20% of the car's purchase price
There's no specific amount you should save for a car down payment. Generally, it's a good idea to put down at least 20% toward the purchase price of a new car or 10% down for a used car. Such a substantial down payment may protect you from depreciation and help you qualify for more favorable loan terms.
Keep in mind, your down payment can include the value of any trade-in, cash or a mix of both. Let's say you want to buy a $30,000 vehicle. In this case, a 20%, or $6,000 down payment, is recommended. If you trade in your vehicle for $3,000, you'd only need another $3,000 to hit your savings goal. If you can save $500 per month, you'll accumulate $6,000 in six months ($500 x 6 months = $3,000 + $3,000 trade-in = $6,000). Of course, saving more each month will accelerate your timeline while saving less will extend the process.
Find High-Yield Savings Accounts
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 primary advantage of HYSAs is their higher annual percentage yields (APYs), so make sure any bank you're considering offers competitive rates. The average rate for the best high-yield savings accounts is around 4.5%. That's over 10 times higher than the national average of 0.43%, according to August 2023 data from the Federal Deposit Insurance Corp (FDIC). 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. Most banks require a low minimum balance or no balance at all, but check to be sure.
- 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.
- Mobile access: Most banks now offer a mobile app for easy access, but check to be sure. It's also worth confirming if you can deposit checks through the app.
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 are solid options for emergency funds and short-term goals, they're not always the best choice for longer-term priorities. Here are some relatively safe options to stash your money for the long run:
- Certificate of deposit (CD): Like high-yield savings accounts, CDs typically offer higher interest rates than traditional savings accounts. With a CD, you'll likely get an even better rate than you would with a high-yield account, but you must agree not to withdraw money for a set term ranging from three months to five years.
- Money market account: Money market accounts combine the best features of savings and checking accounts. They offer high yields like an HYSA while allowing you to write checks and withdraw cash from ATMs. Money market accounts may have transaction limits, such as six per month. Some accounts require you to maintain a minimum monthly balance and fees for failing to meet the requirement.
- 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 independent of 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.
Don't Forget About Your Credit
There's no one-size-fits-all rule about how much money you should put into a high-yield savings account. Once you determine how much money you'll need, you can work backward and divide it by the number of months until your goal to find out how much you need to save each month. Remember, these accounts are great tools to help you reach a savings goal like an emergency fund, vacation or home down payment, and the higher rates help you grow your money a little faster.
While saving and growing your money is an essential component of your financial health, so too is your credit. Maintaining strong credit can help you secure better rates and lower monthly payments on home and auto loans and other types of credit. Consider checking your credit report and credit score for free with Experian to see where your credit stands and take steps to improve your credit as necessary.