You’re hoping to expand your financial portfolio with some investments, and you’re wondering where to start. Should you invest in the stock market? The latest cryptocurrency? NFTs? While these are all exciting options, your first foray into investing shouldn’t be with such high-risk options. You’ll want to direct your attention to a basic, low-risk investment first: a high-yield savings account.
What’s the Difference Between Low Risk and High Risk?
One of the most important financial literacy lessons you can learn is that every investment that you make comes with a level of risk. The risk is that the investment may not work out as originally intended, and you might not make a profit from it — or worse, the investment could result in a financial loss. Higher risk investments come with a greater possibility of financial loss.
Cryptocurrency is the perfect example of a high-risk investment. It’s considered volatile because its value can significantly rise or drop, surprising investors with the dramatic change. For instance, the popular cryptocurrency Bitcoin lost more than 60% of its value in a single year — and that wasn’t even the biggest drop in value for a cryptocurrency at that time. In the same year, Cardano’s value dropped by 80%. Solana dropped by 93%. And Terra dropped by 100%. That’s a major loss for investors.
On the other hand, a low-risk investment won’t be so volatile. The likelihood that you would lose out on your investment is incredibly small. However, the rewards you will get from this type of investment may not be so dramatic.
What Is a High-Yield Savings Account?
A high-yield savings account is a specialized savings account that provides more interest growth than a basic savings account. It typically has an annual percentage yield between 2-5%, which means that the account’s balance receives a small boost beyond personal contributions over the span of a year. The higher the account balance happens to be, the larger the boost from interest it will accumulate.
Why is it a low-risk investment? A high-yield savings account is not considered a volatile investment. Once you open the account and add your deposits, you do not have to worry about your deposits disappearing overnight. Those are your savings to use as you please. Even in the worst-case scenario of bank failure, your account balance should be safe. As long as the bank where you’ve opened this high-yield savings account is insured by the FDIC, you’ll have coverage for up to $250,000 in deposits. Your money should be completely secure and stable.
What Should You Use It For?
You may be wondering, what should you use your high-yield savings account for. One of the best uses for it is an emergency fund.
A high-yield savings account is the perfect storage space for an emergency fund because it is safe, secure and accessible. Some other investment tools will have similar APYs to a high-yield savings account, like a certificate of deposit, but they won’t be as accessible. You’ll want to be able to retrieve savings from your emergency fund at a moment’s notice. After all, you never know when a disaster is going to strike.
And, of course, the interest-bearing capabilities of this investment will help the balance in your emergency fund grow over time, making sure that you’re able to handle more surprise expenses that come your way.
Why Do You Need an Emergency Fund?
Every adult needs to have an emergency fund on hand. Without an emergency fund, you could face an urgent, unplanned expense and not have enough money readily available to pay it off. You might have to turn to other payment solutions to resolve the emergency, like applying for an unsecured line of credit. With an approved line of credit loan, you could use temporary funds to cover your expense and move forward with a repayment plan later. Before you fill out an application, find out the difference between secured vs unsecured options for line of credit loans. The distinction is very important.
So, you should build a personal emergency fund inside of a high-yield savings account. This should be your first step onto the investing path. Start with this low-risk option and then move on from there!