Dave Ramsey Talks About Getting Out Of Debt, But You Can Go One Step Further And Make Your Money Work For You

The overhang of debt is one of the greatest obstacles to building genuine wealth.  This is a sentiment espoused vociferously by podcast financial hosts Dave Ramsey, Suze Orman, Ramit Sethi and others. There are principles of debt that will continue to erode and impede wealth building efforts like a ship struggling against an anchor to reach the open sea.

However, people with limited means who follow this philosophy often find that there is nothing left for investment once putting any funds after expenses into savings. Thankfully, there is at least one asset class that may address both of those problems. 

High Yield Accounts – Earning While Saving

Dave Ramsey is so dead set against accumulation of debt that he personally doesn’t use credit cards – only debit cards. In a number of cases, he will advise elimination of debt as the prime urgency, with savings, and then investment as ancillary considerations.

Many people are dealing with leftover student debt, accrued credit card debt due to inflation escalating the costs of food, fuel, and medicine, and other types of debt. They often find themselves stuck. If they have leftover funds available after covering monthly expenses,and have enough to help reduce debt, they may prefer to add to an emergency savings account, leaving them with nothing left for allocating to investments. 

Suze Orman is especially mindful of telling her callers to save at least a year’s worth of salary in an emergency fund. While the Trump administration’s inflation-fighting policies are commencing, their effects will still take months before prices reduce. For those who don’t have sufficient leftover funds to invest, they can still accelerate the growth of their emergency savings to target an investment start date. Although the average savings account interest rate is offering 0.41% APY, there is an equally viable alternative: High Yield Savings Accounts.

While many High Yield Savings Account HYSA) offerings are online only, a number of institutions, such as TD Bank and Capital One, also offer HYSA from their brick-and-mortar offices. One can easily check to verify an online bank’s credentials. The advantages of a HYSA include:

• APY of as high as 4.0% or more.
• ATM card liquidity without a withdrawal penalty, unlike with Certificates of Deposit.
• FDIC insurance of up to $250,000 per account.
• No account fees.
• Some HYSA don’t even have a minimum balance requirement. 

For all intents and purposes, High Yield Savings Accounts are equivalent in terms of services and protections to standard savings and checking accounts from such institutions as JP Morgan Chase, Bank of America, and HSBC – except for the higher interest rate. 

If the bulk of the funds are allowed to reside in the account long enough to benefit from compounding interest, this will further accelerate the account’s growth towards meeting a target amount so that one can then start investing.

Not Only For Small Investors

People who are already invested or starting investing can still utilize a High Yield Savings Account as an interest bearing liquidity tool. For example:

• Some investors who have growth investments in ETFs or similar asset classes may wish to use a separate HYSA apart from emergency funds, for household expenses. In this fashion,  interest earned on the carried balance can help to replace some of the monthly cash outlays. 
• Investors managing a stock portfolio may look to have an external HYSA if one is not provided by their brokerage firm. The HYSA will earn interest that will generate  extra cash while waiting on the timing for a stock purchase trade or help to offset margin interest accrued if one has one or more leveraged open position trades.
• For investors receiving passive rental income from real estate, the HYSA is a liquid, interest bearing repository to receive those funds, even if not being immediately spent for other expenses, since any additional funds will earn interest in the interim. 
• Investors holding bonds may not necessarily wish to reinvest in other bonds, depending on prevailing interest rates at the time. The HYSA serves as an excellent interest bearing repository for bond generated interest payments that may offer comparable annual interest without the illiquidity of needing to hold the bond until maturity. 
• Families who have children on allowance budgets or who are away at college often need spending money. Rather than risking a credit card that can run up high interest due on frivolous payments, a debit card tied to a HYSA may be a solution, since it offers comparable features to a standard checking and savings account:

1. The HYSA will send an alert to a parent if a balance falls below a preset amount. 
2. The HYSA will have an immediate record of expenditures made on the account, in the case of the debit card being stolen or used by an unauthorized third party.
3. The HYSA can receive additional funds immediately in the case of emergency.
4. The HYSA will create opportunities for better lessons in budget management to teach the kids to learn early in life, which will be invaluable as they get older.

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