Personal savings is a complicated matter. I truly believe the threshold varies from person to person and situation to situation. In general though, everyone should have a readily accessible cash supply in a FDIC insured bank account. The amount and where it is is what can vary.
Personally, I keep very little cash on hand. For my first 6 years of post-grad life I lived in Manhattan with roommates, had zero debt, didn’t own a car, and was steadily employed and insured (same is true today, but my husband is now my roommate).
In my mind, my life was low risk. If for some reason I lost my job and could not find a new one within, say, 2 months, I would pack my bags and move back into my childhood home in Florida. I knew I wasn’t at risk of catastrophe. Being fortunate in this way allowed me to invest most of my money over the years, and I am thankful for that as I know not everyone can do this.
For anyone who does not have a readily accessible backup, such as moving into your parents’ home, then I recommend keeping a higher level of emergency savings. The risk of going into significant debt at the event of an emergency is not worth the potential interest earned on investing in the market. Unfortunately, the interest rate on loans is greater and much more damaging.
Today my life is slightly different. I am now married and officially on the lease of our own apartment. Therefore no matter what happens, I need to be able to pay the rent and bills until the lease is over. The option of “moving home,” shouldn’t be my first instinct.
I have also hit the age of engagements, bachelorette parties, and weddings; so my annual spending definitely has more fluctuation spikes. Therefore I have a personal savings account with a couple thousand in it and keep enough in my checking to cover my monthly credit card bill, my rent, and a $1,000 cushion. That’s really it.
Another change in my life is that my husband and I got married in 2017 and so we had to come up with a way to deal with our finances together. Part of this process involved opening joint bank accounts, which is where we deposited our wedding gifts. (We opted out of a registry, I highly suggest it.) This presented us with a higher cash balance than I had ever carried.
As days went by I just cringed at how much we were losing by not investing the money. But for once, it was not my decision alone to make. (My mother will tell you that I can sometimes be a bit bossy.) For the immediate future the plan is to keep it in a high-yield savings account.
Below is a list of high-yield savings account options we had and what our final decision was. The difference between a specifically high-yield savings account and the savings account you likely have already is the amount of interest paid. As the name implies, you will earn a higher amount of interest in a specifically high-yield savings account. If your cash savings is currently not in a high-yield savings account, I highly suggest you make the change today!
Our original starting place: USAA Savings, providing 0.15% APY. Seemingly more generous than the 0.05% I earn on my sole owner savings with them. (The higher balance of the joint provided for an increase in interest rate.) Still this was painfully low compared to 20% earned in 2017 on my go-to index fund, VFIAX. (Of course market returns are by no means consistent or guaranteed!) As big of a fan of USAA as I am, I knew we had to move the bulk of our savings out and to somewhere offering a higher APY.
My frequently recommended here on Sparkable, Ally Bank offering 1.25% APY. For the past few years Ally has been the talk of the (personal finance) town. It is an online-only bank and their APY is definitely at the higher end of the spectrum. I have heard good things about Ally and up until my next discovery, had assumed we would move our savings here.
The winner. American Express Personal Savings, High Yield Savings Account offering a very impressive 1.35%. Both of us have had American Express cards for a number of years and have always been very happy with them. Therefore when I realized they had a banking side with a high yield savings account offer, I was thrilled. In the end they won out over Ally because of the 0.10% higher APY offered, plus we already knew and trusted American Express as a company.
The other runner up: Marcus by Goldman Sachs offering a whopping 1.40% APY! I can’t say that we won’t switch to Marcus in the future, because that really is the best rate I could find, but for now I was a bit apprehensive. I had read some very bad reviews about their customer service and the extra couple of bucks a year just did not seem worth the potential aggravation. If you have banked with Marcus, please let me know your experience.
Bottom line is that a savings account is for emergencies or specific goals. Savings accounts should not be used to regularly pay bills! The only transaction from your savings should be to transfer to your checking only if necessary or transfer from another account into your savings to…well, save!
Most brick and mortar banks such as Bank of America, Wells Fargo, etc. offer around 0.01 to 0.35% APY. Go ahead and check your own account and see what you are earning. Open up an online statement and search for APY (annual percentage yield.) I bet you the number is well below 1.00%, more likely below 0.10% – tragic!
You can keep your regular checking account too. The only step after opening your high-yield savings account is to link it to an external bank account. Therefore just as you would before, you can initiate transfers between your normal checking account and your savings accounts with a click of a button.
So make a change this New Year and earn some extra money. What takes a matter of minutes to open a new online savings account will earn you money that you were missing out on before. It may sound like a small difference, 0.06% compared to 1.35%, but it adds up.