Why is everyone so obsessed with high-yield savings accounts?
Let’s talk about high-yield savings accounts.
We’ve talked a lot about this in previous episodes, and I think we all understand why saving money is important. We need to save money for when we retire, for fun things like vacations, for unexpected things like vet visits, and for big life changes like buying a house and having a family.
All of those savings goals, though, need to be managed a little differently. If you need help figuring out how much to save, you can check out a previous post/episode, “Saving for Avocado Toast.” I also talk with Fiona, or the Millennial Money Woman, about setting financial goals in the second episode of this season. But today, we’re going to focus specifically on high yield savings accounts. I feel like we’ve talked a lot about the importance of investing so far and I’ve mentioned high yield savings accounts, but I haven’t really talked about the very important role it has in our money management!
Like the name suggests, the purpose of this account is to grow your money in the account, or get a high yield back. And yes, the environment right now during the pandemic is definitely not particularly high yield…in 2018, you could find accounts with rates around 1.5 – 2%. Now, in 2021, you’re more likely to find accounts with rates of around 0.5% due to the current state of the economy. So, yeah, not great, but better than nothing!
Which brings me to the main point. “Nothing”, as in 0% growth, is exactly what you get when you keep your money in your checking account or in cash. You might say, “but what’s so bad about that? If it sits there and I don’t touch it, what’s the problem? This way, I have the money right there when I need it.”
The problem is inflation. What inflation is, put extremely simply, is the price of stuff getting more expensive over time. For example, a gallon of milk cost about 36 cents in 1913. A hundred years later, a gallon of milk cost almost ten times that. And that wasn’t because of a supply and demand issue, but because of inflation.
So what does the price of milk have to do with your money?
Well, let’s say that you put $100 into your checking account or you hide a $100 bill under your mattress. Yeah, that $100 isn’t going anywhere. But the problem is that…it literally doesn’t go anywhere. It doesn’t grow. Meanwhile, the price of milk – and everything else – has increased, so your $100 can buy less – or has less purchasing power – that it did when you first put that $100 away.
This means that in order to keep up with inflation – or at least try to – you need to put that money somewhere that it will grow. On average, the U.S. inflation rate is about 2%. That means that just to keep up with inflation, or be able to buy the same amount of stuff that you used to be able to buy with the same amount of money, your money should grow at 2%.
Does that make sense?
Basically, things will always get more expensive, so you need to make sure your money can keep up with that!
And that brings us to our high yield savings account. I know, I just said that even those can’t keep up with inflation right now – but it’s better than nothing. And hopefully, these interest rates will eventually go back up so that you can at least somewhat keep up with inflation.
Keep your emergency fund and savings for short-term goals (less than 1 year) in a high-yield savings account! Definitely not in your checking account. Or under your bed.
The high yield savings account is where you keep your emergency fund savings – which you should have at least 3 months worth of living expenses saved up in! – and other short term goals, where you can easily take out your money without worrying about it losing any value. An investment account, on the other hand, will have much more growth potential – an average of about 7% per year, conservatively – but it has more ups and downs in the short term, which is why you’ll want to keep your longer term savings – like for retirement or buying a house – in a few years in an investment account.
Lastly, another potential benefit of putting your savings into a high yield savings account instead of leaving it in your checking account is that it’ll be less tempting to take it out. You’ll know that the money you put there is for a specific goal – not for an impulsive shopping trip.
Personally, I use Ally for my high yield savings account, but there are other great accounts out there! I like Ally because they allow me to split my savings up into different buckets within the same account. For example, I can set money aside into an emergency fund bucket, a vacation bucket, new laptop, etc. Whatever your savings goals are, a high yield savings account is one of the best tools you have in order to meet them. Let me know what short term goals you’ll be saving up for in your high yield savings account on Instagram and Twitter at @moneywithmegumi!
P.S. If anyone from Ally is reading and wants to sponsor this podcast, slide into my DMs. 😉
Pingback: Saving for Avocado Toast: How Much Money Should We Save? – Money with Megumi