How long should I keep money in a high-yield savings account?
There's no rule on the exact amount to have in your high-yield savings account. The amount of money you should store in these accounts depends on various factors. However, the general rule of thumb is that you should have liquid access to enough cash to cover between three and six months of your expenses.
A high-yield savings account can be a great place to store your emergency savings. Most experts suggest that you should keep between three and six months' worth of expenses in your emergency account at all times.
For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.
While you can grow your money daily and take on zero risk with high-yield savings, they are not the best way to grow your wealth long-term. The rate of inflation can be higher than the yield you earn over time, so it's better to not keep piling cash into your savings and instead invest your money.
Losing money in an HYSA is rare, but it can happen.
If you're looking for safe ways to grow your money and protect your savings, a high-yield savings account (HYSA) can be a great option. This type of deposit account is available through many banks and credit unions, particularly online financial institutions.
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
While high-yield savings accounts offer high APYs and zero risk, they're not the best way to grow your wealth long-term. That's because your APY can go up and down, and your yield may not outpace the inflation rate.
High-yield savings accounts may have variable interest rates, which may impact earnings. While they aim to offer higher interest rates than traditional savings accounts, these rates may fluctuate over time due to changes in the financial market or the financial institution's policies.
- Variable rates. Interest rates on these accounts can and do fluctuate, which means the APY you started with could potentially drop. ...
- Potential penalties. The Federal Reserve sets and enforces standard rules for savings deposits. ...
- Limited growth.
The IRS treats interest earned on a savings account as earned income, meaning it can be taxed. So, if you received $125 in interest on a high-yield savings account in 2023, you're required to pay taxes on that interest when you file your federal tax return for the 2023 tax year.
What happens if you put 50000 in a high-yield savings account?
How much of a difference does this make? If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.
If you've been stashing your savings deposits in the same account for at least a few years, it's worth checking that the current APY you're earning is competitive with today's top rates. Opening multiple accounts could be one way to ensure that you're maximizing the potential of your savings by earning the top yield.
It's safe from the stock market: If a recession causes short-term market volatility, you won't lose money on your high-yield savings deposits, unlike investing in the stock market. The APY will be working for you regardless (though it could be lower than the rate you had when you opened the account).
- Leverage tax-advantaged accounts. Tax-advantaged accounts like the Roth IRA can provide an avenue for tax-free growth on qualified withdrawals. ...
- Optimize tax deductions. ...
- Focus on strategic timing of withdrawals. ...
- Consider diversifying with tax-efficient investments.
The rate environment is favorable
In fact, rates on high-yield savings accounts are currently hovering around 5%, and you may be able to find something even higher if you shop around for an online bank. On a $10,000 deposit, that would equate to $500 after one year.
How much is too much savings? Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind. Anything over $250,000 in savings may not be protected in the rare event that your bank fails.
Wealthy people do not leave large amounts of money in saving/checking accounts earning no interest or income. Instead they invest their money in stocks, bonds, real estate, mutual funds, etc.
As of April 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Pros and cons of a high-yield savings account
A high-yield savings account offers a higher rate of return on your money compared to standard savings accounts. But some of these accounts charge fees, have minimum balances requirements, and offer variable interest rates that can go up and down over time.
Opening multiple savings accounts can help you earn more interest, but it's essential to read the fine print. Again, some banks have a tiered interest rate structure for savings accounts, meaning you may only earn the highest rates once your balance reaches a certain amount.
Should I put my money in a high-yield savings account or money market?
A money market account gives you more access to your money in the form of direct checking and ATM withdrawals, but it will generally provide a lower interest rate. A high-yield savings account pays a much higher interest rate, but you have transfer limits and few, if any, accounts let you directly spend money.
Once your cash is in a high-yield savings account, it's often not worth the effort to switch to another bank offering a slightly higher APY (such as less than 1% more). This is especially true if your balance is low (more on this below).
At a 4.25% annual interest rate, your $100,000 deposit would earn a total of $4,250 in interest over the course of a year if interest compounds annually. Annual total: $104,250.
Although opening a high-yield savings account can offer many benefits, it won't help you build a credit history. That's because bank account activity typically isn't reported to credit bureaus and doesn't affect your credit score.
5.5% APY: Choosing a 5.5% CD or high-yield savings account will result in $2,750 in interest on your $50,000 investment annually. 5.75% APY: A 5.75% CD or high-yield savings account will earn you $2,875 in interest in one year.
References
- https://apps.irs.gov/app/understandingTaxes/hows/tax_tutorials/mod03/tt_mod03_04.jsp
- https://finance.yahoo.com/personal-finance/can-you-lose-money-in-a-high-yield-savings-account-194525226.html
- https://fortune.com/recommends/banking/what-is-high-yield-savings-account/
- https://www.fool.com/the-ascent/banks/high-yield-savings-pros-cons/
- https://www.businessinsider.com/personal-finance/taxes-on-savings-account-interest-high-yield-savings
- https://www.forbes.com/advisor/banking/savings/best-high-yield-savings-accounts/
- https://www.cnbc.com/select/fed-rate-hike-switching-savings-accounts/
- https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/can-the-irs-get-my-financial-information/
- https://www.usnews.com/banking/articles/do-you-pay-taxes-on-savings-account-interest
- https://www.investopedia.com/articles/tax/10/interest-income.asp
- https://www.cbsnews.com/news/how-much-is-too-much-money-for-a-high-yield-savings-account/
- https://www.fool.com/the-ascent/banks/articles/heres-how-much-interest-can-you-earn-on-10000-in-savings/
- https://www.cbsnews.com/news/should-i-move-all-of-my-money-to-a-high-yield-savings-account/
- https://www.cbsnews.com/news/why-you-should-deposit-10000-into-a-5-year-cd-now/
- https://www.cbsnews.com/news/why-you-should-deposit-10000-into-a-high-yield-savings-account-now/
- https://www.cnbc.com/select/how-much-money-should-you-have-in-a-high-yield-savings-account/
- https://www.latimes.com/compare-deals/banking/savings/7-percent-interest-savings-accounts
- https://www.forbes.com/advisor/banking/cds/7-percent-cd-rate/
- https://www.nasdaq.com/articles/5-key-signs-youre-keeping-too-much-money-in-your-savings-account
- https://www.nerdwallet.com/article/taxes/what-is-backup-withholding
- https://ourfirstfed.com/support/financial-education/basics-of-high-yield-savings-accounts
- https://www.newsweek.com/vault/banking/savings/7-percent-savings-account-interest-rates/
- https://www.cnbc.com/select/myths-about-savings-accounts/
- https://www.experian.com/blogs/ask-experian/are-high-yield-savings-accounts-safe/
- https://smartasset.com/checking-account/money-market-vs-high-yield-savings-which-is-best
- https://finance.yahoo.com/news/4-most-popular-banks-millionaires-150054420.html
- https://www.quora.com/How-can-you-deposit-100-000-in-cash-into-your-bank-with-no-hassles
- https://www.cbsnews.com/news/how-much-100000-earns-in-a-high-yield-savings-account/
- https://ncoa.org/article/the-importance-of-high-yield-vs-traditional-savings-accounts
- https://www.taxact.com/support/1190/form-1099-int-interest-earned-for-the-year-is-10-or-less
- https://www.nerdwallet.com/article/banking/how-much-should-i-have-in-savings
- https://www.cnn.com/cnn-underscored/money/average-american-savings
- https://www.bmo.com/main/personal/bank-accounts/savings-accounts/advantages-of-high-interest-rate-savings-account-canada/
- https://www.manulifeim.com/retail/ca/en/viewpoints/tax-planning/reducing-tax-withholdings
- https://www.investopedia.com/best-1-year-cd-rates-4796650
- https://www.forbes.com/advisor/banking/how-much-cash-should-you-keep-in-the-bank/
- https://www.experian.com/blogs/ask-experian/where-to-put-savings-in-recession/
- https://www.unfcu.org/financial-wellness/50-30-20-rule/
- https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/tax-dictionary-form-1099-int-interest-income/
- https://www.forbes.com/advisor/banking/savings/are-high-yield-savings-accounts-worth-it/
- https://www.investopedia.com/how-much-can-i-earn-with-5000-in-a-high-yield-savings-account-8605191
- https://www.investopedia.com/articles/personal-finance/040915/how-much-cash-should-i-keep-bank.asp
- https://www.cnbc.com/select/pros-and-cons-high-yield-savings-accounts/
- https://www.bankrate.com/banking/savings/how-much-100000-could-earn-you-one-year-savings/
- https://www.experian.com/blogs/ask-experian/alternatives-to-high-yield-savings-accounts/
- https://www.cnbc.com/2023/06/15/how-much-money-it-takes-to-be-considered-wealthy-in-major-us-cities.html
- https://www.cnbc.com/select/how-to-use-high-yield-savings-account/
- https://www.bankrate.com/banking/cds/paying-tax-on-cd-interest/
- https://www.raisin.com/en-us/blogs/difference-between-high-yield-savings-accounts-and-cds
- https://fortune.com/recommends/banking/best-high-yield-savings-accounts/
- https://www.cnbc.com/select/high-yield-savings-account-vs-a-cd-whats-the-difference/
- https://www.cbsnews.com/news/why-you-should-put-5000-in-a-6-month-cd-now/
- https://www.bankrate.com/banking/what-is-a-high-yield-savings-account/
- https://finance.yahoo.com/personal-finance/pros-cons-high-yield-savings-accounts-142347412.html
- https://www.experian.com/blogs/ask-experian/do-you-get-taxed-on-your-savings-account/
- https://www.experian.com/blogs/ask-experian/reasons-to-put-money-in-high-yield-savings-account/
- https://www.cnbc.com/select/high-yield-savings-account/
- https://www.investopedia.com/why-have-multiple-savings-accounts-now-7510818
- https://www.fool.com/the-ascent/banks/articles/this-is-how-much-money-you-can-make-with-5000-in-a-high-yield-savings-account/
- https://www.forbes.com/advisor/banking/savings/how-many-savings-accounts-should-i-have/
- https://www.quora.com/If-banks-only-insure-up-to-250-000-where-do-rich-people-keep-their-money
- https://www.cbsnews.com/news/can-you-avoid-taxes-on-savings-account-interest/
- https://www.cbsnews.com/news/how-much-interest-can-you-earn-on-50000-in-one-year/
- https://www.chase.com/personal/banking/education/basics/pros-and-cons-of-a-high-yield-savings-account
- https://finance.yahoo.com/news/much-money-millionaires-put-checking-120013872.html
- https://www.cnbc.com/select/when-to-open-high-yield-savings-account/
- https://www.raisin.com/en-us/blogs/using-high-yield-savings-account-to-grow-your-money-faster
- https://smartasset.com/financial-advisor/where-do-millionaires-keep-their-money
- https://www.fool.com/the-ascent/banks/articles/heres-why-nows-a-good-time-to-lock-in-a-long-term-cd/
- https://www.americanexpress.com/en-us/banking/online-savings/faq/backup-withholding/
- https://finance.yahoo.com/news/20-000-good-amount-savings-160036732.html
- https://www.bankrate.com/banking/federal-reserve/federal-reserve-impact-on-savings-accounts/
- https://www.investopedia.com/what-can-i-earn-with-10k-in-a-cd-8400034
- https://www.investopedia.com/why-you-should-open-a-high-yield-savings-account-right-now-7511188