A lot of financial institutions advertise high-yield savings accounts as a great place to put your money, and you might be tempted to use such an account for your short-term investment money. Whether such an account is a good option depends on a number of factors, such as how much risk you're comfortable taking and what kind of return you expect your investments to earn.
A high-yield savings account is not a government-recognized separate, specialized type of financial account category. It is simply a savings account that provides a higher yield than that offered by a traditional passbook savings accounts. There's no formula to determine how much higher the interest has to be for the institution to refer to the account as a high-yield account.
Some banks and credit unions offer high-yield savings accounts with no minimum balance and no monthly fee. Others charge a monthly service fee, but might waive the fee if you keep a high minimum balance. Some offer immediate access to your funds through a network of automated teller machines or electronic funds transfer, while others limit you to a specified number of withdrawals per month.
Short-term means different things to different people. In the investment world, short-term typically means an investment that matures within one year, but you might consider short-term to mean accessible upon demand. If you have the ability to keep your money on deposit for up to a year, you might get a higher interest rate and still maintain government insurance with a short-term certificate of deposit. If you need to be able to move your money quickly between investments, and you don't mind forgoing federal insurance, you might find more flexibility with a broker-linked money market mutual fund.
Saving vs. Investing
Before you decide to use a high-yield savings account as a short-term investment, the U.S. Securities and Exchange Commission recommends separating your savings from your investments. Your savings are resources you set aside for planned or unexpected expenses. Those resources should be in a safe, readily accessible place, such as a federally-insured bank account. Investments involve risk, but typically offer the opportunity for a higher return. Because high-yield savings accounts at federally-insured banks involve virtually no risk, they don't really fall under the category of an investment, but they can be a safe place to park some of your investment money while you're waiting for a good investment opportunity.
- Federal Deposit Insurance Corporation: FDIC Insurance Coverage Basics
- National Credit Union Administration: Frequently Asked Questions
- Nolo: Money Market Deposit Accounts and Mutual Funds
- NerdWallet: NerdWallet’s Top 10 High Yield Savings Accounts for the Digital Age
- Washington State Department of Financial Institutions: How To Pick The Short Term Investment That Fits Your Needs
- Securities and Exchange Commission: Differences Between Saving and Investing
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.