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Additional high-yield savings accounts (HYSAs) are the third accounts in the Phippen Tax Accounts You Need Next series because these accounts can help you stay focused on targeted saving and spending goals. To refresh your memory about this account, here is why you need HYSAs:
HYSAs allow you to organize your money to address various mid-term to long-term savings goals while still receiving interest on your money.
Why More HYSAs?
But I already have an emergency fund? Yes, and that is great! Having an emergency fund should be the first step towards increasing your financial stability so you can recover from an emergency or unpredictable financial situation. It is the first account you open after a checking account because it provides you a basic safety net.
Once you have that basic safety net, additional HYSAs provide a stronger safety net and the beginning of the financial freedom we all need to have joy and fun in our lives. Once the high-threshold emergency is covered, we can start to save for lesser contingencies and activities that make us happy. These are the goals of additional HYSAs.
There are two main categories of HYSAs I recommend having:
Specific Safety Nets: These are savings funds for specific areas, but the threshold for use is much lower. An example of a specific safety net that I use is my “car fund.” It pays for any non-recurring expenses related to our car, like EZPass replenishment and car servicing, and grows a bit in case the car ever had significant damage and required repair not covered by insurance.
Happiness Spending Goals: These are targeted buckets to save for specific events or spending goals that will increase your happiness. An example of a happiness spending goal bucket that I have is a “travel fund.” We typically do not spend an equal amount of money on travel each month of the year, so contributing to this account continuously makes it easier to save a bit of money each month and pay for travel when it is time to book a flight.
You should have a separate HYSA for each specific safety net or happiness spending goal. HYSAs facilitate saving for both our best experiences and worst experiences because neither happen on an average day. Spending related to the best and worst events tends to be higher lump sums than other purchases. Lump sums complicate financial planning, particularly when we do not know when we will need to pay them.
HYSAs accrue interest, allowing them to grow over time to account for inflation, but avoid the unpredictability of market fluctuations experienced by funds invested in a brokerage account. Since you cannot predict the state of the market when you need to use these funds, HYSAs provide the balance of a safe investment that still experiences some growth. You can simultaneously avoid market fluctuations and take comfort that your money is not actively decreasing in value due to inflation.
Creating Specific Safety Nets
Specific safety nets target particular areas of your life that have the potential to suddenly demand large expenditures of money. Examples of specific safety nets include accounts designated for car repairs and maintenance, home repairs, uncovered medical and dental expenses, or family emergencies (particularly if you are responsible for a child or family member, but even if you are just the most responsible member of your extended family). As your investments diversify, this is also a great place to house an account to cover expenses related to owning rental properties or small businesses.
To figure out how much to contribute to these accounts, I like to follow the model of real estate investors who calculate “CapEx” (capital expenditure) for a particular property. Calculating CapEx requires knowing two variables:
The cost of a particular expense
How often you are likely to have to spend it
For real estate, items included in a CapEx calculation vary from consistent monthly expenditures to replacing a roof every 20 years. The roof replacement is the kind of lump sum for which you need advance preparation, so here is what real estate investors do:
Rather than being completely surprised by the expense of a new roof, the real estate investor will invest $33.33 each month towards replacing the roof because that is the monthly portion of $8,000 divided over 20 years. The roof may go before that, but the washer and dryer unit may last longer than expected. If the investor consistently saves for a range of potential expenses that will all occur sometime, but not all the time, they will be prepared for whichever cost happens in a particular year.
While this is a common real estate investment practice, you can use it for personal expenses. Applying the concept to your own home is straightforward: Save for the same expenses a real estate investor would because your home has a roof too! For some other expenses it can be a bit more complicated, but using averages and honest assessments of your own risk is a good starting point.
For example, for a car fund, you may total your average gas, tolls, maintenance, and then add $50-$100 more to save for any larger expenses. It is not an exact science, but you do want these accounts to be growing to create larger safety nets.
(To read more about CapEx and find a wonderful worksheet for calculating CapEx, read The Millionaire Real Estate Investor by Gary Keller. It is a must-read if you hope to acquire real estate as part of your investment portfolio, but it is still fascinating for anyone interested in personal finance or home ownership.)
Creating Happiness Spending Goals
Happiness spending goals are where you commit to spend money to increase your happiness! Whoever said personal finances and goal setting were not fun was wrong: Happiness spending goals culminate in all-inclusive trips to Jamaica.
If you do not enjoy pina coladas and a warm ocean breeze from your ocean view balcony in January, happiness spending goals also culminate in purchasing that sectional at age 31 after waiting your entire adult life to finally buy a sectional.
Pure bliss.
Happiness spending goals require setting goals so you can spend on what makes you smile, and we can all use more moments that make us smile! However, the expenses that create lasting joy, like a trip filled with lifelong memories or a sectional that I am gazing at longingly knowing I still have to go for a run before curling up and reading this afternoon, are usually pretty expensive and require mid-term or long-term planning.
Common happiness spending goals include travel, family events (weddings, anniversaries, birthdays), hobbies, events (sports, concerts), a down payment for a home, or the luxury item that actually gives you lasting joy even if it is expensive. They can be as targeted or as vague as you need them to be to keep you focused on your happiness spending goal. For example, travel can be a $300/month transfer that you send to the account and use whenever you need it, or your fund can be a “Bora Bora in January 2025 Fund.” (I hope to see you there!)
Down payments on homes or wedding funds for those interested in a large wedding are especially great targeted HYSAs. Planning for the big purchases makes it easier to say yes to happiness when the opportunity presents itself.
Other HYSAs
Using additional HYSAs to simply organize your money can also add value, particularly for expenses that are inconsistent throughout the year. For example, I have a “Giving” fund. I use it to pay for a gift here and there throughout the year, but the overwhelming majority of the money is used in November and December when I need to buy more loved ones gifts and I donate more money to take advantage of nonprofits that have holiday matches to double or triple my contribution.
Other, less fun HYSAs can be used for annual expenses like your property tax, an annual rewards credit card fee, insurance paid annually (or semiannually or quarterly). Basically, any expenses that vary throughout the year or hit infrequently may warrant a dedicated HYSA to help your financial planning.
Structuring Your HYSAs
Since you have accounts for your specific safety nets and happiness spending goals, name your HYSAs after those safety nets and goals! Make it obvious so you can immediately check if you have the money you need to go see the World Cup.
Take advantage of the easy setup for recurring automatic transfers to your HYSAs. All my HYSAs receive a monthly deposit, whether $25 or $500. For the specific safety nets, use the CapEx logic to determine a good monthly payment. For your happiness spending goals, prioritize them according to how happy they make you. My travel fund receives a ton of money each month, but the furniture fund grows much more slowly. Not traveling would increase my grumpy days exponentially, but waiting on the sectional felt much more tolerable.
You may even find yourself more enthusiastic about a certain goal. If you do, contribute any extra money to it that month! Expedite the path to a purchase or experience. Your money is a tool to improve your life, and HYSAs are an organized structure to help you focus on your life improvement priorities.
About the Financial Accounts Series: The Financial Accounts Series is a four-part series discussing financial accounts that can improve the health of your finances. The Phippen Tax & Financial Services team will provide a deep dive on each of the accounts listed in Part 2, Accounts You Need Next, before releasing Part 3, Accounts You Want. If you missed Part 1, Accounts You Need First, start there! If you would like to seek additional guidance about your personal finances or the specific organization and composition of your financial accounts, please contact Patrick Phippen or complete a new client form if you have not worked with Patrick in the past.
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