The Importance of a High Yield Savings Account Amid a Booming Stock Market
The U.S. stock market has experienced significant growth in the past year with the S&P 500 recording more than 30 percent gains from June 25, 2020 to June 24, 2021. It’s no surprise why more people have dabbled in investing during this period of time.
Still, we want to remind everyone of the importance of a high yield savings account, which should be a crucial part of your financial setup.
High yield savings accounts are emphasized because they offer much higher interest rates than your typical big-bank savings options. Furthermore, they tend to carry fewer fees. Because they don't have branch buildings to maintain and have lower staff costs, online banks typically pay higher interest rates on deposits.
For example, CIT Bank’s Savings Connect account offers savings rates that are up to eight times the national average without any monthly service charges. Other Best Savings Accounts to consider can be found here.
Here are the key reasons why you’d still want to keep money in such a high-yield savings account while the stock market tempts you with positive gains:
An emergency fund is the absolute foundation of one’s personal finances as it is designed to address unexpected expenses that could derail your money plans.
In a scenario where you didn’t have an emergency fund and had to deal with an expensive car repair, you might have to take out a loan or -- even worse -- use a high-APR credit card to pay the bill. It may put on a path of interest payments that lasts months or years and keep you in debt.
Typically, it is a good move to have 3 to 6 months worth of living expenses saved up.
That is, you want to be able to pay for housing (whether rent or mortgage), utilities, and food. If you lose your job, this backup fund allows you to survive while seeking a new source of income.
And, as the pandemic has taught us, we cannot predict how long dire financial situations will last. It may even be wiser to maintain an emergency fund that can last you up to 12 months.
A high-yield savings account for your rainy-day fund is simply the best place to put it because that money can still grow at a competitive rate while being readily available in the event of a financial emergency.
Short-Term Savings Goals
While it’s commendable to want to delve deeper into the realm of investing, don’t forget about the short-term goals -- those that you want to save for in the next couple of years.
Most commonly, they’ll include:
- Major purchase
- Home renovation
- Home down payment
For such short-term goals, you may not want to risk your money in the stock market as you’ll need that money soon. And, if the market was to crash abruptly, it’ll derail those plans very quickly.
Designate your funds (or a specific account) to these goals to help you stay focused. For example, many financial experts offer a 1% rule of thumb of the home purchase price for savings on home repair costs, i.e. a $300,00 home purchase you should set aside $3,000 in savings.
Maintain Your Asset Allocation
A core strategy for investing is to establish a diversified portfolio with an asset allocation that aligns with your goals.
Younger investors are likely to keep a larger percentage of their portfolio in stocks while a tiny amount in cash or cash equivalents. Older investors are often advised to maintain a larger percentage of their assets in cash or cash equivalents.
With the healthy stock market, older investors may find that they need to rebalance their portfolio and move more money into cash -- such as a high-yield savings account -- to maintain the proper asset allocation for their risk tolerance.
Why the Focus on High-Yield Savings Accounts?
We’re major proponents of high-yield savings accounts, often offered by online banks such as CIT Bank, because they tend to provide very high interest rates without the constant threats of fees.
Otherwise, you’re turning down a considerable amount of growth potential if that money is kept in a traditional savings account.
The notable concern may be the safety of your deposits with an online bank.
Luckily, you can rest assured that those savings are eligible for the same type of FDIC insurance as the biggest banks in the country.
Mind Your Financial Footing
There’s no denying that investing is crucial to building wealth and achieving long-term financial goals.
But, before you throw everything at the stock market, remember to secure your financial footing.
After all, the stock market could go south. If it does, you’ll be glad that you prioritized stability before taking on riskier investments.