Sometimes you need to save up a giant pile of cash for a big purchase, like buying a house. And if you’re in the market to buy your first home, saving up for a down payment can be a long and onerous process, and since most of us can’t just whip out our checkbooks and write a check for a down payment, we have to save up for it over time. It might take you months or even years of fastidiously squirreling away extra cash, tax refunds, and work bonuses to be ready to make that big purchase.
As home values continue to increase here in the US, saving that much cash is no easy feat and we need all the help we can get. But, in today’s low-interest rate (and high inflation) environment, keeping a pile of cash in a savings account for any extended period of time is not exactly ideal. Most savings accounts pay well under 1% interest, and with inflation hovering around 8% or higher, the money you’re stashing away for your new home is actually losing value when it comes to purchasing power.
Which sucks.
So, what can you do about it?
Well, not a whole lot, unfortunately. If you’re planning on needing to use that cash you’ve saved any time in the near future – think 3 years or less – then you aren’t going to have a ton of options guaranteed to grow your savings without a risk of it losing value. Which, after all the trouble and effort you’ve gone through to save your hard-earned money, you definitely don’t want to risk losing even a small amount of that savings and not be able to meet your home buying goal.
High-Yield Savings Account
Because I’m always looking for a way for my money to make more money, the route I take whenever I’m saving for a big purchase is to put all of my cash into a high-yield savings account. This is the easiest and safest option that still allows you to accrue some interest on your money each month while keeping your cash fully liquid. You can find a number of banks that offer savings accounts that pay 1% or more APY. I know that doesn’t sound like a lot, but it’s better than nothing, which is probably what you’re currently earning while your money sits in a regular checking account.
Here’s a quick example. Let’s say you’ve already done lots of work and have saved up $25,000 for your future home purchase, and because you are very motivated to enter the world of homeownership, you know that for the next year, you’re going to put aside an additional $2,000 each month. If you do all of your saving in your regular run of the mill savings account, you’re probably earning about .08% APY on average. That means over the course of your 12 month savings plan, you can expect to earn an approximate total of $28.94 in interest.
But if you follow the same plan, and take the extra step to open a high-yield savings account, with an APY closer to 1.2%, you’ll earn an approximate total of $434.10 in interest! That’s a difference of over $405, just for moving your money to a different account! If someone told me they’d give me $405 to take 10 minutes and fill out an online form, I’d do it in a heartbeat. And that’s essentially all it takes for your savings to earn a little extra money that will definitely cover the cost of a few cans of paint and the takeout you inevitably eat the first night you move into your new home.
You can open most of these high-yield savings accounts with no, or very low, initial deposits and interest is earned commission free. Some banks may charge you monthly maintenance fees, which you want to avoid at all costs, so skip those banks and work with ones that don’t charge you unnecessarily. Most of these accounts also carry an APY that is variable and will change by a few fractions of a percentage point over time, and any interest you earn will be taxable. Your money will also be FDIC insured, and most importantly, you don’t need to worry about your savings losing value right when you need it!
Certificate of Deposit (CD)
If you know it’s going to take you a year or more to save up for your big-ticket purchase, you can explore another option by checking out the rates for a Certificate of Deposit, or a CD. A CD basically works the same way as a savings account, where you are guaranteed a fixed rate or return without the risk of the stock market. CD’s usually carry slightly higher interest rates than you would find from high-yield savings accounts, but there’s a tradeoff: you have to keep your money invested for a minimum time frame, which is often one year or more. If you withdraw your money prior to the maturity date of the CD, you can expect to pay a withdrawal penalty. You can earn more interest by buying a CD (some CD’s are offering a 2% APY for a one year investment term) but you sacrifice liquidity, so only pursue this option if you’re certain you won’t need access to this cash before the maturity date.
Personally, I leverage high-yield savings accounts for any cash I keep on hand that I don’t need to cover my monthly expenses, like a percentage of my emergency fund and then whatever cash I might be saving for a bigger than usual expense, like a vacation or a new watch. Even if it’s only a few hundred dollars a year, every little bit of extra earning power helps, especially when it’s being earned on money that is just going to be sitting there anyway.