‘Put your money in the bank’ is what I always remember hearing growing up. This is partly true. What you really want to do is put some of your money in the bank and the rest in the stock market.
Keeping all your money in an average bank, or simply in cash under your mattress, causes it to lose value over time due to this horrible thing called inflation.
So how much money do you want to store in the bank? Enough to cover an emergency, commonly referred to as an emergency fund, typically 4-6 months worth of expenses. That’s it! The rest of it should be in the market where it can grow.
However, if you are saving up for a large purchase such as a car or a down payment on a home, you may also want to keep these funds in your bank - BUT, more ideally they would at least be in a certificate of deposit (CD) until you are ready to buy. A CD is a type of savings account mostly offered by banks to grow your money for a relatively short period of time.
So, checking vs savings accounts. I always wondered why it was called a savings account. I did not find out until recently that savings accounts actually have a growth factor called an annual percentage yield (APY). I never noticed all these years because the banks that I have used thus far have such a TINY APY. They would deposit pennies in my savings account every year and I wasn’t sure why. Well, what do you think your bank actually does with all this money? They are investing it in the stock market! They are making tons of money off of your money and then giving you pennies in return. Because a lot of these funds are locked up in the market, banks will typically have limits in place for withdrawals. Checking accounts on the other hand likely aren’t invested by the bank, so there are no withdrawal limits.
It wasn’t until recently that I discovered ‘high yield’ savings accounts. These are just savings accounts with relatively high APY. For reference, most banks in America have savings accounts with an APY of just 0.06%. Currently (August 2020), high-yield savings accounts have an APY of 0.8%. That’s a HUGE difference. Keep in mind this % changes and fluctuates according to the current financial climate. The 0.8% used to be upwards of 2% just several months ago. As soon as the market recovers, this 0.8% will increase again.
Here’s some quick math: let’s compare a bank with an APY of 2% and one with 0.06%. Let’s say you have $10,000 in your savings account as your emergency fund. After one year, your high-yield account will have paid you 0.02 * $10,000 = $200. Your other account would have paid you 0.0006 * $10,000 = $6. $200 vs $6: which would you rather have?
One downside to most high-yield accounts is that they are online only. I really have no need for a brick-and-mortar physical location bank, so this isn’t really a downside for me personally. Below I listed a few popular banks that offer high-yield savings accounts. These accounts are ideal storage locations for your emergency funds as well a safe place to grow the money you are saving up for a large purchase if you decide against a CD.
A few other minor downsides: - You cannot deposit cash. For this reason If you have a need to deposit cash, I suggest having a separate bank that has a physical location - then you can initiate a transfer between banks if needed. You can deposit checks via smartphone and of course set up direct deposit like any other bank. - The way you get cash out of your account is through any ATM. They provide you with a debit card (assuming you also opened a checking account with them). Unfortunately, there's a limit of $1,000 per day at ATMs. Therefore, should you have a need to withdraw all of your funds in cash in one day, this would not be possible. You can however write a check for any amount OR transfer funds online via Zelle.
Despite these minor downsides, a high-yield account is a wonderful thing to have. Depending on the inflation rate, a high APY account will allow your money to more or less retain its value over time.
High-yield savings (bank) accounts:
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