Saving for a House within 5 years? Here's Where Cash Should Live💰
If you need cash in less than 5 years for a house, kids, or a big goal, here's why it belongs in a high-yield savings and/or CD instead of a checking account.
FINANCE REAL HACK
Vivasollife Mia
7/5/20244 min read
Why I Keep My Near-Term Cash in a High-Yield Savings Account and/or CD?
I want to buy a house in the next two to five years.
I also want to help cover daycare or education costs down the line.
For both goals, I've made a decision that money is sitting in a high-yield savings account (HYSA) and/or Certificate of Deposit (CD),
not in my checking account nor stock market.
Not because I don't believe in investing, I really do, for money I won't touch for a decade or more.
I still keep stocks and increase the cash portions saved in HYSA and CD.
It's because that stock market has higher volatility, and in the short term it can drop lower than the amount you originally put in.
That's too risky when you have a hard deadline. For short-term goals, I believe a HYSA and CD are the right tool.
Checking vs. Regular Savings vs. HYSA & CD
If you're holding cash, you should put it somewhere that earns you interest, means that you can get money from putting your cash in the account.
Here's the simplest way to think about your options:
Here's a quick example.
Let's say you park $20,000 in a HYSA with a 3.5% APY
CD with 4.0% APY (Normally CD is higher rate than HYSA. I'll explain later), Checking & Savings with 0.01% APY
What that actually looks like in dollars
If you leave your cash in your checking or savings account for a year as above graph, you only earn $2 for a year compared with $7-800/year.
If you consider keeping the money as a cash for 5 years, this will make $3,000 to 4,000 differences from earning only the interest fee.
As I explain above, CD is typically higher than HYSA and I will tell you why below.
Also, the interest rate will be changed due to the federal interest rate increase/decrease as well. So, the above number is just as an example.
Even if you're not planning to have a big purchase in short term, I highly recommend keeping your money in HYSA or CD if you keep as a cash.
What's difference between HYSA and CD?
Both are safe places to park cash and earn more than a regular bank account.
The difference is really about how easily you can touch the money.
Both are safe places to park cash and earn more than a regular bank account.
The difference is really about how easily you can touch the money.
HYSA (High-Yield Savings Account):
Think of it as a savings account that pays real interest. You can add or withdraw money anytime, no penalty.
The interest rate can move up or down over time since it's tied to broader rates.
Good for money you might need on short notice such as emergency fund, a goal that's flexible on timing.
CD (Certificate of Deposit):
You lock money away for a set term (1 month, 3 months, 6 months, 1 year, etc.) at a fixed rate that doesn't change for the life of the term.
In exchange for giving up access, you often get a slightly higher rate.
Touch it early and you'll usually lose a chunk of the interest as a penalty. Good for money you're confident you won't need until a specific date.
Simplest way to decide: if there's any chance you'll need the cash before a certain date, HYSA.
If you know for sure you won't touch it until then, a CD can lock in a bit more.
Which HYSA and CD provider is good?
There are so many providers for HYSA and CD, and you may think which one should I use.
In my next article, I will give you my personal recommendation for the above provider and the reasons why.
As of today, it's been more than 2 years since I start having HYSA and CD.
I could have earned from the interests while saving for our big goal in 5 years as of today.
2 years ago, I was just out of college and not knowing about HYSA or CD at all.
Only the option I have known was Checking account through the local bank with 0.01% APY.
I was basically losing money due to the high inflation.
I have met this book called "I Will Teach You to Be Rich" and learned a lot about the personal finance which nobody thought me before.
Since then, I recommend this book to my coworkers, friends, my family and partner, basically everyone.
If you want to change your life to be richer and smarter, read or listen to this book via below link.
Ready to have your Rich Life?
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This post is for informational purposes only and reflects my personal experience and opinions and it's not financial, tax, or legal advice. Rates, limits, and account terms change, so double-check current numbers before making a decision, and talk to a licensed financial advisor or tax professional for advice specific to your situation.
