I built my emergency fund $100 at a time, but I didn't make real progress until I opened a high-yield savings account

Business Insider Finance 0 month ago

I'm crazy about my high-yield savings account

Even though interest rates have fallen quite dramatically over the last several months, I'd still recommend a no-fee, high-yield savings account to just about anyone. 

A few years ago, I was struggling to build up an emergency fund. I'd been saving automatically in my 401(k) since I first started working, but it dawned on me that I had no real cash safety net.

I started squirreling away leftover money into a regular savings account every month. The problem was that it was attached to my checking account — and it earned meager interest. Every time I logged on, I could see the money I had earmarked for savings. Not only was I often tempted to spend it, I was occasionally discouraged by how little I had amassed.

Then I decided to heed the recommendation of a coworker and open a high-yield savings account at Ally. At the time, the online bank was offering an annual percentage yield (APY) well over 2%. The process of opening the account truly couldn't have been easier. I didn't have to put any money down, but I set up a direct deposit of $100 per paycheck and left it alone.

I doubled my account balance in just one year

As my balance grew, my interest payments — which many high-yield savings accounts, including Ally, pay out monthly — increased, too. Just before I hit my emergency fund balance goal, I got a raise. I bumped up my per paycheck contributions to $200 before the raise even hit my bank account; I didn't miss the money since I'd never had it in the first place. 

I had to dip into the account a few times as minor emergencies called for it. Ally limits withdrawals (or transfers, technically, since it's all online) to six per month and each additional one is $10, but I have yet to exceed the limit. Some other high-yield savings accounts, like Wealthfront and Betterment, allow unlimited monthly transfers, which is a nice feature if you think you'll be pulling from the account regularly.

Ultimately, the high APY, combined with automatic deposits, supercharged by savings progress. In 2018, I doubled my high-yield savings account balance, which included $68 in interest. Despite a few rate drops this year to Ally's current 1.7% APY, I'm on track to earn over $120 in interest in 2019.

If I ever need to drain the account for a real financial emergency, I'll rest easy knowing I won't be charged any fees for a low balance and I'll still earn a solid interest rate. Now I'm working on building up my travel fund using the same strategy.

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