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Having $8,000 in savings is a solid achievement. It puts you ahead of many Americans who couldn't cover a $1,000 emergency. Not only that, but your savings will also work for you by earning interest.
Depending on what top high-yield savings account you use, $8,000 in savings could generate over $400 a year in interest payments. The exact amount depends on what annual percentage yield (APY) your account pays.
Savings accounts are still paying high returns
You might have seen headlines about falling savings rates recently. Don't let them put you off from opening a high-yield savings account. It's true, the Fed's rate cuts have had an impact on savings APYs. However, rate cutting is a gradual business and you can still earn solid yields from your savings today.
More important than the rate cuts is the knowledge that not all savings accounts are created equal. The average savings APY is 0.46%, according to the FDIC. If you've got money in a savings account that's paying less than 1%, you are missing out on potential interest payments.
Learn more about which high-yield savings accounts will pay over 4.00% APY -- nearly nine times more than the national average.
Here's the difference a high-yield savings account can make:
| APY | Annual Interest Earned on $8,000 |
|---|
| 0.46% | $36.80 |
| 1.00% | $80 |
| 2.00% | $160 |
| 3.00% | $240 |
| 4.00% | $320 |
| 5.00% | $400 |
Data source: Author's calculations.
When you're comparing savings accounts, it is easy to look only at APYs. After all, you can earn hundreds of extra dollars by switching to a high-paying account. However, minimum deposit requirements and monthly fees matter as well. It's also good to factor in how you want to bank -- an online-only bank may not have all the features you need. For example, they lack in-person customer service.
Know how much you need in savings
When you think about how much interest you can earn on your savings, it's natural to wonder whether you might earn even more by parking your money elsewhere. For example, by investing it in the stock market or locking it away in a CD.
But you need to have some money in savings before you invest or open a CD. It's like unlocking levels on a computer game.
The common wisdom is to keep three to six months' worth of expenses in a savings account. Sure, CD rates are often higher and they are fixed (unlike savings APYs). But your savings are your cushion against the unexpected and you need them to be accessible -- and a CD is not. You might earn slightly less interest in a savings account, but you'll have peace of mind.
To know how much to keep in savings, look at your monthly expenses and think about how you might cope if you lost your job or faced a medical emergency. Do you have more than one source of income? And how many people rely on you financially? These questions can help you decide how many months' expenses to sock away.
Once you've hit your target, consider how any extra cash might work best for you. That might mean putting it toward other savings goals, such as a down payment for a house or car. You might also decide to invest your money by buying assets that you hope will perform well in the long term.
Right now, the very best savings APYs are just over 5%, but that won't last forever. In contrast, the S&P 500 has historically generated average annual returns of almost 8% or more. To put that into real money, let's say you invested $8,000 and left it alone for 30 years. An investment earning 8% a year would earn about $46,000 more than one that earned 5%.
| Return | 5% | 8% |
|---|
| Portfolio value (approximate) | $34,500 | $80,500 |
Data source: Author's calculations.
Investing carries more risk than savings accounts. There will be good and bad years, and there are no guarantees. But having a solid savings cushion makes it easier to leave your investments alone. If you invest money you don't need for five to 10 years or more, you'll be able to wait out any bad years and allow compound interest to work in your favor.
Bottom line
Your savings are crucial because they give you financial stability. Keep them in a high-yield savings account to maximize your interest earnings. And once you've saved enough, consider investing to build wealth for the future.
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