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If you have money you want to set aside but also want to keep liquid, a high-yield savings account is a good place to park it. High-yield savings accounts offer an annual percentage yield (APY) on deposits that's higher than traditional savings accounts. They can be used to save up for major purchases, unexpected bills and more.
High-yield savings accounts are available at many major banks and credit unions, and often have no monthly fees or minimum balance requirements. They can be especially useful as a way to avoid charging up a credit card if you need to make a large purchase or pay for an unexpected emergency. If you have a high-yield savings account (or you're thinking about opening one), here are five ways you can use this type of account.
1. Save for Emergencies
Emergency savings is money you sock away to cover surprise expenses or monthly bills if you lose a source of income. The rule of thumb is to have money in savings to cover three to six months' worth of living expenses. However, $1,000 in savings is a good start, and contributing small amounts of $50 or $100 from each paycheck into a high-yield savings account could help grow your rainy day fund balance over time.
2. Save for Major Purchases
Big-ticket items, such as new furniture, appliances, a house or a car, can be difficult or impossible to buy without having money in savings. For example, furnishing an entire house can cost a whopping $16,000 or more, and the cost of appliances can vary widely by make and model, according to HomeAdvisor. A refrigerator, for example, could cost as little as $430 or as much as $10,600. Using money saved in a high-yield savings account could help you avoid paying interest charges if you were to put the purchase on a credit card.
If you're saving for a down payment on a car or house, you may want those funds to be liquid, while earning as much as possible as you save. If you're hoping to save up a 20% down payment on a house, for example, setting aside money in an account that earns higher interest could make a sizable difference in how quickly you get there.
3. Save for Big Events or Life Changes
Expensive social events and major life changes like moving to a new city are exciting but costly. Even a local move costs $1,250 on average, according to Moving.com, and a long-distance move of 1,000 miles could cost nearly $5,000. Weddings can set you back even more, with the average wedding in 2021 costing $28,000, according to The Knot. If you have a major event approaching, stashing money in high-yield savings could be a good way to save for some or all of the costs, lowering the amount of money you need to borrow for the occasion.
4. Save for Child Expenses
Parents can use high-yield savings accounts to save up for a child's first car and other expenses, like holiday presents, school supplies and clothes throughout the school year. And if you're not a parent yet but have plans to start a family, a high-yield savings account could be a place to put away money for baby expenses and gear that's not gifted at a baby shower.
When it comes to college savings, however, state-sponsored 529 savings plans are usually a better place to save for school because of their tax advantages. Money in 529 plans is often invested in mutual funds and exchange-traded funds (ETFs), which are more likely to offer you a greater return on your savings over time than a high-yield savings account. Moreover, contributions to a 529 savings plan could qualify for a state tax deduction. A regular high-yield savings account doesn't offer these same tax perks.
5. Save Retirement Funds You Want to Keep Liquid
Financial institutions may offer high-yield IRA savings accounts you can use to put money away for retirement, and funds are backed by the Federal Deposit Insurance Corporation (FDIC). For long-term retirement saving, investing in stocks, bonds, mutual funds and exchange-traded funds (ETFs) instead of putting money in a high-yield savings account will likely offer you a better return that keeps up with inflation. However, high-yield savings could be a safe and low-risk place to stash money you want to keep liquid as you get close to retirement and during the golden years.
How to Shop for a High-Yield Savings Account
If you're in the market for a new savings account, banks and credit unions are currently offering high-yield accounts with APYs ranging from 1% to 3% (versus a national average of .17% for savings accounts overall). Factors besides APY to consider when shopping around for a savings account include account fees, bank features and convenience. For example, some banks offer easy-to-use mobile banking tools and have no minimum account deposit. The bank where you have your checking account may be an easy place to start, but you may find better rates using an online bank or credit union.
If you're working on your credit and a bank doesn't offer free credit scores, you have other options to track your score. You can get your FICO® Score☉ for free from Experian. When an expense comes up that savings can't cover, having strong credit can help you qualify for low rates on loans and credit if you decide to borrow.