The Pros And Cons Of High-Yield Savings Accounts And How They Compare To Investing (2024)

Key takeaways

• A high-yield savings account offers high rates and is a safe place to keep your cash
• Deciding whether to put money into the stock market or a savings account is a personal decision, where risk tolerance is a determining factor.
• Consider prioritizing saving over investing if you need liquid cash soon.

Saving and investing are critical to building wealth but play different roles in your money management system. A savings account is extremely safe but earns a lower return. Stock market and similar investments may offer much higher yields but also carry higher risks of losses. Here are significant differences between the two.

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High-yield savings accounts explained

Not all savings accounts are equal. You may encounter different opening minimums, withdrawal rules, fees, and interest rates, among other differences. Many savers focus primarily on interest rates, as that’s the main driver of how money your idle cash earns. If your money sits somewhere, why not get the biggest possible return?

Parking money in a high-yield savings account may seem optimal in a rising interest rate environment. You may see emails from your bank announcing higher interest rates on everything from savings accounts to credit cards. For your savings, a higher interest rate is better.

In most ways, an online high-yield savings account is similar to a traditional savings account at a brick-and-mortar bank. However, you’ll likely earn an interest rate well above the national average and with lower fees.

The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) insure all savings accounts in the United States up to $250,000 per depositor per account. That guarantees you’ll get your money back, even if the bank goes out of business.

Advantages of a high-yield savings account

Here are some benefits of placing money into a high-yield savings account.

High APY

People often choose a high-yield account because of the higher APY rate than traditional banks. Recent surveys have placed the national average yield for savings accounts at 0.23% APY. Comparatively, a high-yield account can stretch up to and above 4% APY. The money sits in both accounts, but one is more likely to pay more to account holders.

Cash liquidity

In an emergency, an account where the cash is liquid and can easily be transferred is beneficial. Your funds are well within reach in a high-yield savings account, even if the number of withdrawals you can make penalty-free is limited.

FDIC insured

Government-backed protects your funds in legitimate savings accounts. Coverage is worth up to $250,000 per depositor per financial institution. That means you’ll get up to $500,000 in coverage for joint accounts. Always look for the FDIC logo, or NUCA logo when working with credit unions, to ensure you’re protected by this government insurance.

Low barrier of entry

Many high-yield savings accounts don’t require a minimum deposit to open an account. Many also have no minimum balance requirement to avoid fees or earn interest. This makes them an accessible option for people who don’t have thousands to deposit. Even better, some savings accounts offer a bonus if you meet minimum deposit requirements in a new account.

Disadvantages of high-yield savings account

While these accounts have many upsides, there are a few downsides to remember.

Limited withdrawals

Federal law formerly protected savings account holders from penalties on some savings account withdrawals. That portion of Regulation D is no longer in effect, but some banks maintain that policy. Review your savings account terms for any fees associated with withdrawals or transfers to be safe.

Rate change over time

Savings account rates can change over time depending on the economy, and predicting how the economy will move in the future is not easy. Currently, rates have been rising due to the Fed increasing rates, but there isn't much you can do about them.

Return on investment

The return on investment in the account can be modest and may sometimes fall below inflation rates in the country. Depending on your goals, a saving account might not be in your best interest.

Should you save in a high-yield account or invest?

Everyone wants to grow their money faster. But as you search for higher interest rates, you’ll also generally find higher risk. Generally, the higher the rate of return, the more risk an investor will take on, and vice versa. Before you make a decision, consider the following.

Purpose of the funds

The money you save for an emergency needs to be readily available. These funds are not meant to build wealth but to offer financial security in the event of large unexpected expenses or income losses.

Savings are like a spare tire. It’s not very exciting, but you’re glad to have it when needed. The same philosophy applies to your savings. But as savings accounts earn relatively little interest, funds beyond emergency savings may be better off in an investment account.

Individuals saving cash in a high-yield savings account should consider their goals. If you’re saving for an upcoming event, investing in the stock market and taking on additional risk makes little sense, especially in a volatile market.

Added risks

More risk leads to higher potential rewards. Investors typically accept multiple risks, whether investing in government bonds or individual stocks. Imagine investing thousands of dollars in Tesla stock on February 2, 2022, only to watch your investment drop 39% over the next year. Make sure that added risk is something you’re willing to accept.

The critical question before investing is, “am I prepared to lose this money?” Your answer to that question can guide where your funds go next. A diversified portfolio is better than investing in a few stocks. You have several tools at your disposal to achieve this goal.

For example, investing in a mutual fund or ETF offers exposure to many stocks, bonds or other investments simultaneously. An S&P 500 ETF attempts to provide investment results corresponding to the yield of the S&P 500, a listing of 500 of the biggest public companies in the United States. While the average return of the S&P 500 is around 10% per year over a long period, it is far less predictable over a shorter horizon period. Results from this recent three-year period show the volatility stock market investors may experience.

• 2020: 18.40%
• 2021: 28.59%
• 2022: -18.14%

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The bottom line

Saving versus investing will be a personal decision largely contingent on how much risk you are ready to accept. High-yield savings accounts provide smaller returns with minimal risks while investing in the stock market has the potential for higher rewards with more risk involved.

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