If you’re saving for any reason, one of the best places to keep your money is a high-yield savings account. High-yield savings accounts are incredibly safe and give you an interest rate far better than you would get from a traditional bank savings account. In some cases, you could earn over 100 times more. That’s a huge difference!
Keep reading for five of the best uses of high-yield savings accounts. If you’re saving for any type of long-term need, these included, choose a low-cost, high-interest account. Some of our favorites are the Axos High Yield Savings and CIT Savings Builder.
Remember, you don’t have to keep a high-yield savings account at the same bank as your checking account. In fact, it may be better to keep it somewhere else to remove temptation. But more on that later on.
Without any further ado, here are five great uses for a high-yield savings account.
1. Storing Your Emergency Fund
According to the Federal Reserve, 40% of households could not afford a $400 purchase from savings. If that sounds like you, it’s time to get started with an emergency fund. Using a high-yield savings account, you can save a little at a time for a rainy day or financial emergency.
If your kid gets hurt and needs a visit to the ER, if your car sputters to a stop or if your furnace decides to stop working (on New Year’s Eve when it’s below freezing, of course), you can tap into that emergency fund instead of going into debt.
I’ve kept my emergency fund in high-yield savings accounts for more than a decade. I’ve had few financial emergencies, but I never had a financial crisis thanks to my savings.
2. Saving for Vacations or a Big Purchase
I’m a big fan of using credit card rewards to pay for vacations, but I can’t pay for the entire vacation with rewards miles and points. For the activities, meals and other needs on vacation, it’s good to have savings set aside.
Many people use high-yield savings accounts to automatically save a certain amount from every paycheck for future vacations. Others may set up a temporary savings goal for a major purchase. When I wanted to buy a $1,000 DJ mixer, I saved around $50 per month in a high-yield savings account until I could make the big purchase debt-free.
3. Down Payment for a Home or Car
New cars and homes are some of the biggest purchases you’ll ever make in your life. To lower your monthly payment and improve your odds of getting approved for a loan, it’s a good idea to save up a big down payment.
When your money is in a high-yield savings account, it will likely earn a lot more than your checking. At the same time, funds are protected by the FDIC for up to $250,000 per account holder per financial institution. That means you get up to $500,000 in insurance on joint accounts. That’s a winning combo for your biggest savings goals.
4. Savings Accounts for Kids
As a dad to two amazing girls and an awesome little boy, I want to make sure my kids are financially prepared for the future so they can start life on a solid footing. That includes college savings and long-term investments. When they are old enough to have their own money, and it’s more than fits in a piggy bank, high-yield savings is the best place for them to save.
Kids should get the same FDIC insurance and higher interest rates that you do, after all. And thanks to the power of compounding, kids may see the best benefits, as their funds have more time to grow. Showing them their bank statements and interest earned can teach them important lessons about money while motivating them to save instead of spend.
5. Removing the Temptation to Spend
Some people have a personality where they can’t seem to hold onto money for very long. It’s important to understand yourself and your money habits. If you’re the kind of person who loves to spend every dollar they earn, a high-yield savings account can be a barrier that helps you save with less temptation to use the money on a new Xbox or Tory Burch bag.
If you are paid with direct deposit, you may be able to split your paycheck into two accounts. Sending part of your income to savings automatically means you won’t even miss it. If that’s not an option, setting up recurring transfers from checking to savings makes it so you regularly add to savings without having to think about it.
High-Yield Savings Are the Best Kind of Savings
I don’t know about you, but I’d rather have more money than less money. If you want to make more from your savings, a high-yield savings account is definitely the best choice. And with other benefits like FDIC insurance and automated savings features, there’s no reason to settle for a sub-par savings account.
If you’re in the market for a better savings account, check out our list of the best high-yield savings accounts to fit your needs.