In the midst of an environment with high inflation and a potential mild recession in the near future, it’s essential to have a contingency plan in place. While there are multiple alternatives to safeguard your emergency fund, opting for a top-performing high-yield savings account (HYSA) can help maximize the value of your funds, offering an impressive 5.02% annual percentage yield (APY). By investing an initial amount of $16,732, equivalent to three months’ worth of the average annual expenses for all consumer units in 2021, an HYSA with a 5.02% APY can earn you approximately $72 in interest each month, in just one year.
- A standard practice while establishing a contingency fund is to ensure that it covers a minimum of three to six months of your expenses.
- Assuming you invest your emergency fund of $16,732 in a high-yield savings account with an annual percentage yield (APY) of 5.02%, you can earn nearly $860 in interest within a year.
- Changes to the fed funds rate by the Federal Open Market Committee (FOMC) typically affect savings account interest rates in a corresponding manner.
How a High-Yield Savings Account Can Help Your Emergency Fund Grow
A common financial principle is to have an emergency fund that can cover at least three to six months’ worth of your expenses. Based on the 2021 data from the U.S. Bureau of Labor Statistics, the average annual expenditures for all consumer units were approximately $66,928 or roughly $5,577.33 per month. Using this guideline, you would need to have an emergency fund worth at least $16,732 ($5,577.33 multiplied by three months).
If you deposit your emergency fund of $16,732 into a high-yield savings account (HYSA) with an annual percentage yield (APY) of 5.02%, compounded monthly for one year, you could earn $72 per month in interest. This would amount to a total of $17,591.54 at the end of one year without any additional contributions, resulting in an increase of approximately $860 in the value of your emergency fund.
Even if you opt for a different HYSA with top-paying rates, you could still earn over $750 in interest in a single year. Moreover, the longer you save, the more interest you will accrue. For instance, if you deposit $33,464 (six months’ worth of expenses) into your HYSA, it could increase by approximately $1,719 in a year, twice the amount for a three-month deposit.
Savings Accounts with the Best APY Rates
| Financial Institution | APY | Initial Deposit | Interest Earned After One Year (Rounded) | Monthly Interest Earned (Rounded) |
|---|---|---|---|---|
| CFG Bank | 5.02% | $16,732 | $860 | $72 |
| Newtek Bank | 5.00% | $16,732 | $856 | $71 |
| UFB Direct | 4.81% | $16,732 | $823 | $69 |
| Vio Bank | 4.77% | $16,732 | $816 | $68 |
| CIT Bank | 4.75% | $16,732 | $812 | $68 |
| Bask Bank | 4.65% | $16,732 | $795 | $66 |
| Popular Direct | 4.65% | $16,732 | $795 | $66 |
| Salem Direct Bank | 4.61% | $16,732 | $788 | $66 |
| Upgrade | 4.56% | $16,732 | $779 | $65 |
| Western State Bank | 4.55% | $16,732 | $777 | $65 |
| Bread Savings | 4.50% | $16,732 | $769 | $64 |
| First Foundation Bank | 4.50% | $16,732 | $769 | $64 |
| Ivy Bank | 4.50% | $16,732 | $769 | $64 |
| TotalDirectBank | 4.50% | $16,732 | $769 | $64 |
| BankPurely | 4.45% | $16,732 | $760 | $63 |
| iGObanking | 4.45% | $16,732 | $760 | $63 |
Source: investopedia
It’s important to note that not everyone can afford to invest three to six months’ worth of expenses in a savings account immediately. However, by starting with a one or two-month emergency fund and regularly contributing any leftover budget into a high-yield savings account, you can achieve your three to six months’ worth goal over time, aided by the interest earned.
APY & the Fed Funds Rate
The Annual Percentage Yield (APY) is a standardized measure of an account’s interest rate expressed as a percentage of the total balance. When it comes to interest-bearing savings accounts, the APY can be affected by changes in the Federal Reserve’s target interest rate, known as the federal funds rate. Increases in the federal funds rate may lead to higher savings rates for interest-bearing accounts.
Recently, the Federal Open Market Committee (FOMC) has raised the benchmark rate to combat inflation. As a result, interest-bearing savings accounts may also increase their savings rates. However, it’s important to note that the federal funds rate can also be lowered, which can affect savings account interest rates. Therefore, it may be wise to deposit available funds into a savings account with a high APY to earn as much interest as possible before rates potentially drop.