Why you should have a high yield savings account is because it allows you to earn interest while you save—a win-win scenario. But how much money you put into a high-yield savings account will depend on your personal savings goals and financial situation.
High-yield savings accounts function similarly to traditional savings accounts, except that the annual percentage yield (APY) is greater. The APY on savings accounts averaged 0.05% as of December 2020, according to the Federal Deposit Insurance Corporation. Rates on high-yield savings accounts have taken a hit during the COVID-19 crisis, but still come in higher than those of traditional accounts.
As with traditional savings accounts, you'll likely be limited in how many withdrawals and transfers you can make from a high-yield account each month. You'll also owe income taxes on the interest you earn. Still, these accounts can be quite useful for growing an emergency fund or saving money for a big, short-term expense (such as a vacation or wedding).
Because your savings goals are unique, the amount you should put into a high-yield savings account is as well. But there are ways to calculate that number for yourself.
What Is the Recommended Amount to Put in a High-Yield Savings Account?
There are a couple of factors to consider when funding your high-yield savings account. One is your purpose for saving, and the other is your savings goal—the balance amount you want to reach. Common uses for these accounts include building emergency savings or paying for a short-term expense.
Emergency fund: Your emergency fund should be able to cover three to six months' worth of expenses. The goal is to be able to afford essential expenses—rent or mortgage, utilities, groceries, prescriptions, debts—if you lose your income due to a layoff or illness, for instance.
It's a good idea to keep your emergency fund in a savings account you can easily access, as opposed to investing it in a longer-term vehicle such as a mutual fund, so you can withdraw cash immediately without risking financial loss.