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5 smart ways to use a high-yield savings account

These accounts offer some of the best interest rates out there, helping your money grow faster.

Yahoo Personal Finance· Getty Images
5 min read

A high-yield savings account (HYSA) can be a safe place to store your cash in many different scenarios.

High-yield savings accounts provide higher-than-average interest rates compared to traditional savings accounts. And unlike a high-yield CD, you can withdraw your money from an HYSA whenever you need access to the funds without penalty.

Although an HYSA isn’t the perfect fit for every financial situation, there are many wise uses for this type of account. Here’s how to use a high-yield savings account to your benefit if you’re considering opening one.

See our picks for the 10 best high-yield savings accounts available today>>

In general, high-yield savings accounts offer higher annual percentage yields (APYs) than traditional savings accounts. In July 2024, the average interest rate banks offered customers on savings accounts was 0.45%. Meanwhile, several high-yield savings accounts offer rates of 5% APY and up.

If you’re saving money for any short-term to mid-term goal, an HYSA could be a great place to store your cash. Below are five smart ways to use a high-yield savings account if you’re looking for inspiration.

No matter how much money you earn, it’s a good idea to create an emergency savings fund to prepare for unplanned expenses or times of financial hardship. Many financial experts recommend tucking aside at least six months’ worth of expenses in an emergency fund to provide a sufficient financial cushion.

Even if you can’t afford to put aside much money yet, it’s fine to start where you can. As a bonus, using a high-yield savings account can help the money you do save grow at a faster rate.

Read more: How much money should I have in an emergency savings account?

If you’re in the market to buy a new house or car, there’s a good chance you’ll need to save up a down payment to accompany your loan. A sizable down payment could improve your odds of qualifying for a loan, result in a lower monthly payment, and help you lock in a more attractive interest rate on your financing.

Of course, saving money for a down payment may take time. A mortgage down payment could cost you as much as 20% of the loan amount (on a conventional loan) if you want to avoid paying private mortgage insurance (PMI). Many financial experts recommend a 10% to 20% down payment on a car loan as well.

Instead of charging your vacation expenses on a credit card, it’s wise to save the money for your next getaway in advance. A high-yield savings account can be a good place for a sinking fund to store cash for an upcoming trip — especially if you find an account that offers a competitive interest rate that will help your savings grow at a faster rate.

Once you have enough money set aside for your travel plans, it’s fine to charge those expenses on a rewards credit card to earn extra points, miles, or cash back. Just be sure not to exceed your vacation budget. As long as you follow this rule, you can use the money you saved in advance to pay off your full credit card balance and avoid debt and expensive interest charges.

If you’re a parent looking to open a savings account for your child, a high-yield savings account is a great option to consider. A good kids savings account should offer the same perks that an adult’s savings account offers, including competitive interest rates and FDIC insurance to keep your child’s savings safe.

Plus, if you’re using a savings account as a tool to teach your son or daughter financial literacy, an HYSA can be a solid resource for hands-on learning.

Whether you’re saving for a wedding, a retirement party, or some other major milestone, you may need time to put away the money you need to celebrate your upcoming event in style. You might be surprised to learn that the average wedding costs around $35,000. And other large events can be costly as well.

Most people don’t have the cash available to pay for large events without some advanced preparation — at least not if they want to stay out of debt in the process. So, a high-yield savings account can be a great place to store your cash while you’re putting away money to afford these types of financial goals.

A high-yield savings account from an FDIC-insured bank (or an NCUA-insured credit union) can be a useful financial tool for many people.

If you’re looking for a safe place to store your money while earning a competitive interest rate, an HYSA may work well for your situation.

However, keep in mind that a savings account may not be the best choice for long-term investment goals. For retirement savings and other long-term needs, consider talking to a trusted financial adviser about the best options for where to invest your money.

The amount of interest you earn in a high-yield savings account (or any other deposit account for that matter) depends on several factors, including the APY, interest compounding frequency, and fees.

As an example, say you deposit $1,000 into a high-yield savings account with a 5% interest rate that compounds daily. At the end of a year — assuming you don’t make any more contributions — you’d earn $51.27 in interest.

Read more: How to save $10,000 in a year

Despite their benefits, there are a few drawbacks to using high-yield savings accounts. First, HYSAs feature variable interest rates. When the Federal Reserve adjusts the federal funds rate, those changes can have a trickle-down effect on the APYs banks and credit unions offer customers on HYSAs and other deposit accounts. So if rates drop, you could end up with a lower interest rate on your balance.

HYSAs usually aren’t a great fit for long-term savings goals either, since the interest rates banks offer on these accounts aren’t historically as competitive as market investments (like stocks and bonds).

Read more: High-yield savings account vs. investing: Which is right for you?