I always end up owing taxes, and a high-yield savings account means the bill never catches me by surprise
- As a freelancer, I don't get taxes automatically taken out of my paycheck. I have to estimate my tax rate and pay my own taxes, split up into four yearly payments called quarterly estimated taxes.
- This means that I have to stow away a good portion of each paycheck until tax time comes, or I could end up owing thousands of dollars to the IRS when I file my annual taxes in April.
- I choose to keep that money in a high-yield savings account because it's easily accessible but earns a higher interest rate than a regular savings account. This means my savings doesn't lose as much value to inflation.
- See Business Insider's picks for the best high-yield savings accounts »
As tax season rolls around, there's lots of talk about "getting the biggest refund." But what if you end up owing money?
Whether you're a freelancer who has to save up to pay taxes yourself or someone who tends to underpay taxes each year, it's smart to have that money saved up and stashed away so you're prepared to pay your tax bill on time.
The question is, where do you stash it? As a freelancer who has to save up money from every paycheck to pay my own taxes each quarter, the answer is obvious: a high-yield savings account.
I keep my tax money in a high-yield savings account so it doesn't lose value over time
Since a portion of each paycheck is money I can't touch (because it belongs to the IRS), it's crucial for me to physically set that money aside in a separate account so I'm not tempted to spend it. I have to access those funds every few months, so it makes the most sense to park that tax money in a savings account until I need it.
Unfortunately, most savings accounts from major national banks only offer interest rates of 0.01% to 0.03%, which is basically nothing. And since inflation has hovered around 2% in recent years, that means the money in your regular savings account is actually losing money.
However, high-yield savings accounts offer interest rates that come closer to, and sometimes even surpass, the inflation rate. The best high-yield savings accounts are currently offering an APY between 1.60% and 1.85%, which is a significant improvement from 0.01%.
If you were to put away $1,000 each month into a savings account with a 0.01% APY, you'd earn just $0.55 in interest by the end of the year. Using a high-yield savings account with a 1.85% APY, you'd earn over $100 in interest.
What to look for in a high-yield savings account
The rate is, of course, one of the most important factors, as it determines how much money you're earning on your savings. However, it shouldn't be the only feature you consider. This is especially true considering that rates can change at any time, and the bank with the highest rate today might not have the highest rate tomorrow.
You want a high-yield savings account that's completely free - no strings attached. If it comes with a monthly fee, or if you have to maintain a minimum balance to avoid being charged, then fees will eat into your earnings.
Most online savings accounts are free, luckily. Some do require a minimum opening deposit or a minimum daily balance, so make sure you can meet those requirements. If not, there are a number of free high-yield savings accounts with a $0 minimum opening deposit and $0 minimum balance requirement.
Make sure the bank you choose is FDIC-insured. This will guarantee your funds, typically up to $250,000, even if the bank fails.
Whether you're saving your taxes or building up an emergency fund, you need short-term savings to remain fairly liquid.
With a high-yield savings account from an online bank, you'll usually have to wait a few days to access your funds while they're being transferred to your checking account. This should be fast enough to cover most expenses, but if you're worried about not having immediate access to your funds, you can get a high-yield savings account that comes with an ATM card.
You may also want to consider customer service. Some online banks have more limited customer service hours than others. Almost all lack physical branch locations, so if that's important to you, you might want to look elsewhere. That being said, there are a select few high-yield savings accounts offered by financial institutions that have physical locations - these include Capital One, HSBC, and a few credit unions.
I use my high-yield savings accounts for all of my short-term savings needs, taxes included. They're easy to use, free, and get me a higher rate than a regular bank, so why wouldn't I?
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