Every week when I get paid, I typically deposit about 5% of my paycheck into my high-yield savings account (HYSA). I use Discover, which currently offers an APY of 4.10%, down from 4.25% when I first opened the account. I realize this rate may drop further, given the Fed’s optimistic outlook for the economy and their intention to lower interest rates. In my view, an APY above 4% is quite good for outpacing inflation historically while also avoiding market risks, all while keeping an emergency fund that earns a reasonable return.
At what point should someone think about stopping their weekly deposits into the HYSA and potentially start withdrawing funds to invest in the market? What is the lowest interest rate a HYSA could reach?
Start considering tax-advantaged options like short-term treasuries, municipal bonds, or money market funds that invest in them. Depending on your tax bracket, you might come out ahead on an after-tax basis compared to leaving money in bank accounts, where interest is taxed as ordinary income.
The HYSA is being seen as an investment tool by you. It’s not. It is a location to safely store cash where you may also collect interest as a bonus.
Since I don’t utilize the HYSA as an investment tool, whatever above and beyond my emergency savings flows into investments; this doesn’t change even with the current changes in interest rates.
Even if I have a little window of time before making this purchase, I still save it. I run the danger of losing money if I invest it in the stock market, and I might not have enough to make the purchase.
I won’t receive so much more money on my cash if I just receive 2% instead of 5%, which won’t even speed up a buy by a month or two.
That likely depends on how soon you plan to make those purchases, right? There could be fees or taxes when selling. If you need the cash within a year, you might end up paying more in fees or taxes than if you just kept it in a high-yield savings account (HYSA).
Almost all brokers have eliminated transaction fees. Only gains are subject to taxation. Though you profited more than you would have in a HYSA, you may pay more in taxes as a result.
If your annual income is less than $40, then why are we even having this conversation? Otherwise, you must pay taxes on an HSA as well. Whether you utilize the money or not, you must pay taxes. When using equity, taxes are only due upon sale.
Yeah, that’s what I am getting at there are short-term and long-term capital gains. From what I’ve seen, short-term gains (within the first year) are taxed at a higher rate than long-term gains. So if you save in a high-yield savings account (HYSA), you might actually come out ahead after taxes compared to putting money in an index fund for less than a year and then selling.