High-yield savings accounts, or HYSAs, are a solid choice for stashing away your emergency fund. They’re safe—thanks to FDIC insurance—and offer you the flexibility of quick access while your money quietly grows.
However, once your savings start looking robust, it might be time to explore other avenues for your cash. I recently transitioned some funds from my HYSA to my Roth IRA. Here’s why I made that move.
1. I Hit My Emergency Savings Target
Financial experts often advise socking away three to six months’ worth of living expenses in an emergency fund. This stash creates a financial cushion if you lose your job or encounter unexpected expenses, like car repairs or medical bills.
After reviewing my bank accounts, I found I had more than enough set aside for emergencies. So, I decided to allocate some of that money towards opportunities with higher potential returns.
By the way, if you’re eager to boost your earnings beyond the national average APY, check out our curated list of the best high-yield savings accounts to amp up your savings game.
2. My Roth IRA is Ideal for Long-term Savings
A chunk of my paycheck—about 15%, including my employer’s match—goes into my 401(k). After that, my remaining disposable income heads to a Roth IRA. This strategic move allows me to invest in the stock market while enjoying years of tax-free growth.
Roth IRAs are retirement accounts with benefits like exemptions from capital gains tax and dividend tax. Since you’ve already paid income tax when you earned the money, once you hit 59 1/2, you can withdraw the funds tax-free. This advantage can save you significant amounts during retirement. However, it’s crucial to dive into the Roth IRA guidelines because not everyone qualifies to contribute.
Personally, I channel most of my Roth IRA investments into an S&P 500 index fund. This fund provides exposure to 500 prominent U.S. companies, offering instant diversification and delivering returns far greater than a savings account.
Take the past five years, for instance—the S&P 500 Index has soared by 87%, which is nearly quadruple what top-tier savings accounts could provide.
3. Savings Accounts Can Lose Value With Inflation
Even the top HYSAs sometimes offer interest rates that lag behind inflation rates. In 2022, consumer prices in America spiked by 8%, outpacing any savings account APY. Most years, even with modest inflation, the best savings accounts might struggle to stay ahead.
While an HYSA is excellent for short-term needs, I’m cautious about parking all my funds there and watching their purchasing power limp. Investing in stocks offers the growth trajectory essential for securing a pleasant retirement.
An HYSA is Non-negotiable for Me
I’ll never fully drain my HYSA (or at least, that’s the plan!). These accounts are the perfect spot for cash you might need sooner rather than later. I view HYSAs as crucial for:
- Emergency funds: Maintain enough to cover three to six months of expenses.
- Short-term goals: Use an HYSA for near-future plans, like a vacation, wedding, or home renovation within the next couple of years.
For goals extending beyond that timeframe, most people should steer towards higher-growth investments, like stocks, ideally within an IRA. This approach is one of the strongest pathways to achieving long-term financial stability.
