Choosing Between High Yield Savings and Investing (2024)

FAQs

Choosing Between High Yield Savings and Investing? ›

Cons of High-Yield Savings Accounts

“While investing in a diversified portfolio representative of the entire market will likely yield a greater return on your investment than a high-yield savings account over time, there is also a correlating risk with that potential gain.” Here's what you should know about the risks and rewards of saving and investing.

Cons. Withdrawal limits. Like regular savings accounts, high-yield savings accounts may come with a monthly withdrawal limit, such as six withdrawals a month, and can charge a fee if you exceed this limit. Limited access to your money.

If you don't need the money for at least five years (or longer) and you're comfortable taking some risk, investing the funds will likely yield higher returns than saving. If you're eligible for an employer match in your retirement account, such as a 401(k).

Saving provides a safety net and a way to achieve short-term goals, while investing has the potential for higher long-term returns and can help achieve long-term financial goals. However, investing also comes with the risk of losing money.

High-yield savings accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation or the National Credit Union Administration. So your money is as safe as it would be in a traditional savings account.

Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.

What are the cons of a high-yield savings account? Variable rates. Interest rates on these accounts can and do fluctuate, which means the APY you started with could potentially drop. Keep your eye on such changes and remember that the money is yours; at any time, you can move it to a bank that offers a higher rate.

How much of a difference does this make? If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.

Gaines reiterates that even most high-yield savings accounts lose value to inflation over time. “More than two months' worth of living expenses in a savings account is too much given the ability to earn around 5% from easily accessible money market accounts that should not fluctuate in price.”

Should I keep money in savings or invest? ›

Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.

Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.

Aim to build the fund to three months of expenses, then split your savings between a savings account and investments until you have six to eight months' worth tucked away. After that, your savings should go into retirement and other goals—investing in something that earns more than a bank account.

With a high-yield savings account, you can save for short-term goals and emergency expenses, both of which can benefit from the lack of risk associated with bank accounts. But if you want to build wealth for the future, investing has the potential to give you better returns in the long run.

Save to meet short-term goals like building an emergency fund. Investing means putting your money into a riskier vehicle with the expectation that your money will grow over time. Investing involves more risk, but could come with higher returns. Invest for long-term goals (e.g., retirement, paying for college)

They could be completely afraid to invest. It could be that their risk tolerance is very low. Maybe they just don't think they want or need any additional funds. Being content is another reason that someone wouldn't invest.

A money market account gives you more access to your money in the form of direct checking and ATM withdrawals, but it will generally provide a lower interest rate. A high-yield savings account pays a much higher interest rate, but you have transfer limits and few, if any, accounts let you directly spend money.

A high-yield savings account can be a great place to store your emergency savings. Most experts suggest that you should keep between three and six months' worth of expenses in your emergency account at all times.

For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.

The Bottom Line. If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings. It's worth noting that a recession doesn't mean you should pull all your money out of the stock market.