This is not professional advice. This is just where I compile my thoughts and what I learn.

Step 1: Find an account

that helps your money grow

Step 1: Put your money somewhere it can make money

While we figure out how to invest, let’s park our money somewhere it can make some money instead of lose value over time because of inflation.

Where though?

  • High-Yield Savings Account

  • Money Market Account

  • Certificates of Deposit (CDs)

  • Treasury Securities (like Treasury Bills, Notes, and Bonds)

  • Short-Term Government Bonds

Let’s start with some definitions

  • High-Yield Savings Account

    A High-Yield Savings Account is a savings account that provides a higher interest rate compared to regular savings accounts, enabling faster growth of savings. These accounts are commonly available through online banks and credit unions and generally come with lower fees and balance requirements.

  • Money Market Account

    A Money Market Account is a type of savings account that typically offers higher interest rates than regular savings accounts. It combines features of both savings and checking accounts, allowing limited check writing and debit card usage. These accounts usually require a higher minimum balance and may have higher fees.

  • Certificates of Deposit (CDs)

    A Certificate of Deposit (CD) is a savings product offered by banks with a fixed interest rate and fixed maturity date. It typically offers higher interest rates than regular savings accounts but requires you to leave your money deposited for a set period, with penalties for early withdrawal.

  • Treasury Securities: Treasury Bills, Notes, & Bonds

    Treasury Securities are government-issued debt instruments that finance federal spending. Treasury Bills are short-term securities maturing in a year or less, Treasury Notes are medium-term securities maturing in 2 to 10 years, and Treasury Bonds are long-term securities maturing in 20 to 30 years. All pay interest and are considered low-risk investments.

  • Short-Term Government Bonds

    Short-Term Government Bonds are debt securities issued by the government with maturities typically ranging from one to five years. They offer lower interest rates compared to long-term bonds but are considered low-risk investments due to the government's backing.

  • Question: What makes a short-term government bond different from a treasury note (T-note) or a treasury bill (T-Bill)?

    Answer: While T-Bills and short-term T-Notes are specific types of short-term government bonds, the term "short-term government bond" can refer to any government-issued debt with a short maturity, encompassing both T-Bills and shorter-maturity T-Notes.

Train of Thought

Okay. So I want to park my money somewhere where it can make money while I figure out this whole investing thing. What are some of my options?

  • High-Yield Savings Account

  • Money Market Account

  • Certificates of Deposit (CDs)

  • Treasury Securities (like Treasury Bills, Notes, and Bonds)

  • Short-Term Government Bonds

I want to still be able to access my money whenever I want in case of an emergency?

  • High-Yield Savings Account

  • Money Market Account

  • Certificates of Deposit (CDs)

  • Treasury Securities (like Treasury Bills, Notes, and Bonds)

  • Short-Term Government Bonds

    Out of these options, a High-Yield Savings Account and a Money Market Account allow me to take out money whenever I want. Certificates of Deposit (CDs), Treasury Securities (like Treasury Bills, Notes, and Bonds), and Short-Term Government Bonds generally have restrictions or penalties for early withdrawal.

Do I pick a High-Yield Savings Account or a Money Market Account?

The primary differences between a High-Yield Savings Account and a Money Market Account are:

  1. Interest Rates: Both accounts usually offer higher interest rates compared to standard savings accounts, but the exact rates can differ between institutions.

  2. Access to Funds:

    • High-Yield Savings Account: Provides straightforward access to funds, typically without the option for check-writing or debit card usage.

    • Money Market Account: Often includes limited check-writing and debit card access, offering more flexibility for transactions.

  3. Minimum Balance Requirements:

    • High-Yield Savings Account: Usually has lower minimum balance requirements.

    • Money Market Account: Generally requires a higher minimum balance to avoid fees.

  4. Fees:

    • High-Yield Savings Account: Typically comes with lower fees and fewer restrictions.

    • Money Market Account: May have higher fees and more transaction restrictions per month.

In summary, a High-Yield Savings Account is ideal for saving with minimal transaction needs, while a Money Market Account provides more flexible access to my funds.

My Choice

My first step before I start investing money is to save enough money to have a 3 month emergency fund.

A 3-month emergency fund is a savings buffer that covers your basic living expenses for three months. It serves as financial protection for unexpected situations like job loss, medical emergencies, or major repairs. This fund usually includes costs for housing, utilities, food, transportation, and insurance.

This means that I won’t be needing to pull out money that often. I also don’t want to be worrying about minimums and having to pay fees. For these reasons I will be going with a High-Yield Savings Account!

***Note: There are taxes! This is something I wasn’t even thinking about when I was first considering a high-yield savings account.

Taxes - A Quick Summary

1. Interest Income

  • In the United States, interest earned on high-yield savings accounts is taxable income that must be reported on your annual tax return.

  • Interest earned on high-yield savings accounts, is generally taxed as ordinary income.

  • This means it is added to your total income for the year and taxed at your marginal tax rate, which could range from 10% to 37% depending on your income level.


2. Tax Reporting

  • At the end of each tax year, your bank or financial institution will send you a Form 1099-INT detailing the amount of interest income you’ve earned from your savings account.


3. State Taxes

  • In addition to federal taxes, you may also owe state income taxes on the interest earned, depending on your state’s tax laws.

  • California:

    • In California, interest earned on a high-yield savings account is subject to state income tax. This interest income should be reported on your California state tax return along with any other taxable income you have earned during the year. California's state income tax rates vary depending on your income bracket, with rates ranging from 1% to 13.3%. It's important to include all interest income from your savings accounts when calculating your state tax liability.