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- Keeping cash on hand is important — it’s liquid, which means you have immediate access to it when you need it.
- But should you keep it in a regular bank savings account? A checking account? A high-yield savings account?
- I tell all my financial planning clients that if they have they want to keep on hand for more than a year — like for a down payment or an emergency fund — the best place for it is a high-yield savings account, most likely with an online bank.
- Find out who has the best high-yield savings account rate right now »
Keeping some of your assets in cash is important. The liquidity of cash provides you flexibility and safety, especially if you face an unexpected or emergency situation.
This doesn’t mean, however, you need to start stuffing dollar bills into your mattress. Banks provide a safe and convenient place to store your cash (and keeping money in the bank means keeping it protected from loss, theft, or disaster, like fire).
The question isn’t so much should you use a savings account for your cash — the answer to that is probably “yes” — but what kind of account you need.
Business financial make money capital trading Some cash can hang out in your existing accounts
Earmarking each dollar of your cash helps you understand the purpose it serves. From there, you can decide what kind of bank account is best for each chunk of your money.
Cash that acts as a buffer or that you plan to spend relatively soon can live in your checking account if you have a way to track it (and not accidentally spend it).
And if you have a few goals you want to fund in the next year or so, opening a savings account at your current bank might work just fine since the cash won’t sit in the account for very long anyway and this might be most convenient for you.
But if you have any cash that might be sitting around for a long time, you need to consider how to get that money working as hard for you as possible (while also keeping it as safe as possible).
Business financial make money capital trading Know when to use a high-yield savings account instead
Cash that makes up your emergency fund, that will go toward a goal requiring more than just a few months to save up for, or larger sums over $10,000 shouldn’t go in just any old savings account.
When you start building up large amounts of cash, it’s time to look at using high-yield savings accounts.
A high-yield savings account provides interest rates that are typically much higher than standard savings accounts. A higher interest rate helps you make the most of the cash that you need to keep readily available, and can make it easier to reach your financial goals.
The best high-yield accounts are usually found with online banks. You don’t have to move all your existing accounts over to a new institution, but at the very least, you should compare available rates and choose a high-yield account for large cash sums.
Make sure you evaluate if a bank requires a minimum deposit amount before they’ll give you their best rate. Many require you to keep minimum balances of $5,000 to $10,000 (or more) in order to lock in high rates, which is why high-yield accounts are often best used as homes for emergency savings (which you shouldn’t touch on a normal basis) or really big cash amounts (like what you’d need to save up if you wanted to buy a house).
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Business financial make money capital trading What if you have too much cash?
While high-yield savings accounts act as good vehicles for making the most of the cash you need to keep on hand, you still need to avoid the risk of keeping too much cash in the bank.
“Too much cash” doesn’t sound like a real problem, but an excess of cash can pose a risk to your long-term goals. To determine how much you really need, you need to consider:
- If you want a buffer in your checking account so you don’t risk overdrafting. $500 to $1,000 might be a good place to start.
- What three to six months’ worth of expenses looks like; calculate what that is for you, target a number within the range, and set that aside as your emergency fund.
- How much your short-term goals cost (remembering that “short-term” in this case means anything you need funding for in 5 years or less).
So, for example, if you want $1,000 in your checking account to act as a buffer, $10,000 in your emergency fund, and $50,000 set aside to use as a down payment on a house in two years, you need $61,000 in cash — and $60,000 of that should be kept in a high-yield savings account.
If you had more cash than that amount, it could also go into a high-yield savings account, but if you want to grow your wealth, you’ll want to consider investing that excess so it can potentially earn an even higher return than what you’d get from a high-yield account.
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