Quick Tip: Using A High Interest (aka High Yield) Savings Account As You Save For A Down Payment

First off I should probably say I’m not a financial advisor and therefore this post is not intended to give advice or specific instruction regarding your personal finances.  You should consult a licensed professional for that. 

But my friend Phil put me on to High Yield Savings Accounts a few years ago, and this is something that is so simple and useful I’m surprised I didn’t know sooner that these existed.

Most of us probably have a savings accounts with one of the big national banks, e.g. Chase, Wells Fargo, Bank of America, etc. I could be wrong, but I think most of us opened these accounts by default. At some point when we started working, probably in our teens, we knew we needed bank accounts, so we went to the nearest bank and just opened a checking and a savings account purely out of convenience.  Or our parents took us to open a savings account when we were young to “teach us the value of money”. And then we’ve probably been using the same accounts for years.   

What is a High Yield Savings Account?

Only a few years ago did I learn there are alternative, online banks with which you can open accounts that earn more interest than traditional savings accounts from traditional banks.  Though the interest rate for these High Yield Savings Accounts (HYSA) can fluctuate and change month to month depending on the money market, the interest rate (aka “yield”) will typically be about twice as much as a traditional savings account. 

As a real-world example, (as of the date of this post) my Wells Fargo savings account has an Annual Percentage Yield (APY) of .05%.  In comparison, my American Express savings accounts’ current APY is 1.6%

How A High Yield Savings Account Can Help You Save For A Down Payment

Admittedly, earning less than 2% interest a year isn’t going to help you flip $100 into $1,000. As such, having a HYSA alone will not help you save for a down payment faster than the act of simply making consistent deposits into any savings account. But if you can essentially earn double the return with a HYSA, then you might as well take advantage of it. 

There is another practical reason a HYSA is beneficial. It can be helpful to have a savings account at a different institution from your checking account so that you don’t see it, and to prevent you from instantly transferring money from your savings into the checking account. This can help stop you from pulling money out of your savings on an impulse.

Lastly, here’s one last positive side-effect worth mentioning I’ve personally experienced from using HYSAs. Simply having to think about and pay attention to where my money is, and whether or not it’s in the most efficient place to achieve my financial goals, has made me more interested and engaged with my personal finances. It’s helping me develop better ways of thinking and habits when it comes to handling money.

Other Ideas On How To Make the Interest Work For You

The interest you earn on your savings is essentially free money.  It won’t be much, but it’s something, and one idea is to put that money into other vehicles that earn better interest in the long run. The two vehicles that immediately come to my mind are an Individual Retirement Account (IRA) or an Index Fund. Now, how do you choose which funds to invest in? Well that question is above my paygrade and should be directed to your financial advisor. 

Where Can You Get A High Yield Savings Account?

If you Google “High Yield Savings Account” they are easy to find. NerdWallet recently made a post about the 10 Best High Yield Savings Account of April 2020. For me personally, I have savings accounts with American Express and WealthFront, and depending on who’s offering the better APY at the time I’ll move money between the two accounts.

In Conclusion

If you have a big purchase as a financial goal, whether it be a down payment for a house, or a car, or perhaps an engagement ring and a wedding 😏🙃, you’re going to need a savings account.  A High Yield Savings Account is an interesting option that will help you earn more interest than a savings account from a traditional bank.