Broker Check
Maximizing Your Money: Balancing High-Yield Savings Accounts and Smart Investing

Maximizing Your Money: Balancing High-Yield Savings Accounts and Smart Investing

February 07, 2024

High-yield savings accounts have been a trending topic lately, thanks to their annual percentage rates (APRs) hovering around 5%. This is enticing, especially considering the US inflation rate of 3.4%. In a world where the cost of goods and services continues to rise, high-yield accounts can help you maintain your purchasing power. 

With these accounts in the spotlight, many people are now pondering how to make the most of their idle cash. They're looking for ways to grow their savings while ensuring easy access to their funds when necessary. 

However, before we delve into the world of high-yield savings accounts and investing, it's essential to define your financial goals with a financial plan. Understanding your short-term and long-term objectives is fundamental. This entails evaluating your risk tolerance, envisioning future expenses, assessing various revenue sources, and considering your cash flow requirements. 

The Basics: Saving vs. Investing 

To grasp the concept of saving versus investing, envision saving as stashing your money in a piggy bank – the goal is to preserve it while any growth is a bonus. Conversely, investing is akin to planting seeds in your garden, hoping for a full harvest down the line. 

When to Save 

Emergency Funds 

Having an easily accessible emergency fund is a universal recommendation. If you're in your working years, your emergency fund should cover three to six months' worth of living expenses. For those nearing retirement, extending it to 6 to 12 months is advisable, particularly in regions like Silicon Valley, where job stability in the tech sector can be unpredictable. This fund serves as a financial safety net for unexpected expenses, such as medical bills, car repairs, taxes, or unplanned trips, all while earning a modest return. 

A high-yield savings account is an ideal choice for this fund, as long as it offers flexibility in the number of transfers and is FDIC insured. 

Big Purchases and Expenses 

Planning for significant expenses like buying a home or a car in the next five years warrants an easily accessible savings account. A higher APR can work in your favor when aiming for a lower interest rate on your home purchase. Additionally, saving for expenses such as insurance, property taxes, and home maintenance is wise. 

Setting up an automated monthly transfer to your high-yield savings account for these expenses, along with your emergency fund, simplifies the process. However, bear in mind that interest rates on these accounts may fluctuate over time, potentially leading to smaller returns. 

When and How to Invest 

Once you have your emergency fund and living expenses securely tucked away in an account with a higher APR, whether it's a high-yield savings account or a CD, it's time to contemplate long-term goals. Investing is a key to achieving these goals, whether you're planning for retirement, generational wealth, income generation, real estate investments, or simply long-term wealth accumulation. 

This also applies if you suddenly acquire a substantial sum of money through business sales or inheritance. This capital doesn't need to be readily available for emergencies or short-term objectives; it can be strategically invested to achieve higher returns over time. 

However, investing in the stock market takes consistency. There will be highs and lows, but the key is to keep your portfolio smartly diversified and to stick with it. 

Investment Accounts 

Investment accounts serve as versatile financial vehicles, allowing you to invest in stocks, bonds, and more. Keep in mind that earnings in these accounts are subject to taxation when you sell assets. Therefore, we recommend working with a financial advisor who can provide tax-intelligent guidance alongside investment expertise. They can also help you with diversification of your portfolio and making decisions that align with your risk tolerance and goals. 

Retirement Accounts (IRAs, 401(k)s) 

For retirement savings, individual retirement accounts (IRAs) and 401(k)s are invaluable. These accounts enable you to defer taxes on earnings until your retirement, and many employers offer matching contributions, further boosting your savings potential. 

Education Accounts (529 Plans**) 

If you're saving for educational expenses, such as your child's or your own secondary education, consider 529 plans. These accounts facilitate tax-free growth for educational purposes. Please keep in mind that the withdrawal must be utilized for qualified educational expenses, and it may be subject to income taxes depending on your state of residence.

By striking the right balance between high-yield savings accounts and strategic investments, you can make the most of your idle cash while working toward your financial goals. 

In conclusion, the choice between saving and investing remains a deeply personal one. Saving is crucial for covering short-term needs and emergencies, providing a financial safety net. In contrast, investing comes into its own when you're aiming for long-term goals, such as securing your retirement or building wealth over time. 

The key takeaway is that there's no universal answer.  

Your financial strategy should align with your individual goals, risk tolerance, and financial situation. In this ever-evolving financial landscape, making well-informed decisions is the key to achieving financial success. Whether you're saving for immediate needs or investing for your future, remember to tailor your approach to suit your unique aspirations and journey toward financial well-being. 

If you would like help in creating a financial roadmap, determining the right balance of saving and investing, or adjusting your investments as time progresses, contact us at Johanson and Yau. After all, milestones like retirement and funding your children's education happen once in a lifetime, but at our firm, we guide people through these pivotal moments every day.

* Diversification does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets. Investments are subject to market risks including the potential loss of principal invested.

** Units of the 529 plan investment options are municipal securities and may be subject to market value fluctuation. Before investing in a state specific 529 plan, you should compare your own state's qualified tuition program and any state tax or other advantages it may provide.