key takeaways
- A high-yield savings account offers high rates and is a safe place to keep your cash.
- Deciding whether to invest money in the stock market or savings account is a personal decision, where risk tolerance is a determining factor.
- If you need liquid cash quickly, consider prioritizing savings over investments.
Savings and investing are important for wealth creation but play different roles in your money management system. A savings account is extremely safe but gives low returns. The stock market and similar investments can provide very high yields but also carry high risks of loss. Here there are important differences between the two.
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High Yield Savings Accounts Explained
Not all savings accounts are the same. You may encounter different starting minimums, withdrawal rules, fees and interest rates, among other differences. Many savers focus primarily on interest rates, as this is the main driver of how much your idle cash earns. If your money is sitting somewhere, why not get the greatest possible return?
In a rising interest rate environment, putting money in a high-yield savings account may seem optimal. You may see emails from your bank announcing higher interest rates on everything from savings accounts to credit cards. For your savings, the higher the interest rate, the 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 earn an interest rate well above the national average and with fewer fees.
The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) insures all savings accounts in the United States up to $250,000 per account per depositor. This guarantees that you will get your money back, even if the bank goes out of business.
Benefits of High Yield Savings Account
Here are some of the benefits of keeping money in a high-yield savings account.
high apy
People often choose a high-yield account because of the higher APY rate compared to traditional banks. Recent surveys put the national average return for savings accounts at 0.23% APY. By comparison, a high-yield account can spread up to and beyond 4% APY. Money sits in both accounts, but account holders are more likely to be overpaid.
cash liquidity
In emergencies, an account where cash is liquid and can be easily transferred is beneficial. Your money is well within reach in a high-yield savings account, even though the number of withdrawals you can make penalty-free is limited.
FDIC Insurance
Government-backed keeps your money safe in legitimate savings accounts. Coverage is up to $250,000 per depositor per financial institution. This means you’ll get coverage of up to $500,000 for joint accounts. Always look for the FDIC logo, or the NUCA logo, when dealing with credit unions to ensure that you are protected by this government insurance.
low barrier to entry
Many high-yield savings accounts do not require a minimum deposit to open an account. Many do not have minimum balance requirements to avoid fees or earn interest. This makes them an accessible option for those who do not have thousands to deposit. Even better, some savings accounts offer bonuses if you meet the minimum deposit requirements for the new account.
High-Yield Savings Account Disadvantages
While there are many advantages to these accounts, there are also some downsides to remember.
limited withdrawal
Federal law previously protected savings account holders from penalties on certain savings account withdrawals. that part of Regulation D No longer in effect, but some banks maintain that policy. To be safe, review the terms of your savings account for any fees associated with withdrawals or transfers.
rate change over time
Savings account rates can change over time based on the economy, and predicting how the economy will fare in the future is not easy. Currently, rates are rising because of the Fed raising rates, but there’s not much you can do about them.
return on investment
The return on investment in the account can be modest and can sometimes fall below the rate of inflation in the country. Depending on your goals, a savings account may not be in your best interest.
Should you be saving or investing in a high-yield account?
Everyone wants to grow their money fast. But as you seek higher interest rates, you will typically find higher risk as well. Generally, the higher the rate of return, the more risk the investor is taking, and vice versa. Before making a decision, consider the following.
purpose of funds
The money you save should be readily available for an emergency. These funds are not meant to build wealth but to provide financial security in the event of a large unexpected expense or loss of income.
Savings is like a spare tyre. It’s not very exciting, but you’re glad to have it when you need it. The same principle applies to your savings. But as savings accounts earn relatively little interest, money beyond emergency savings may be better placed in an investment account.
Individuals looking to save cash in a high-yield savings account should consider their goals. If you are saving for an upcoming event, investing in the stock market and taking on additional risk makes little sense, especially in a volatile market.
added risk
Higher risk leads to higher potential rewards. Investors generally accept a number of risks, whether they are investing in government bonds or individual stocks. Imagine investing thousands of dollars in Tesla stock on February 2, 2022, only to see your investment decline by 39% over the next year. Make sure the additional risk is one you are willing to accept.
The important question before investing is, “Am I prepared to lose this money?” Your answer to that question can guide where your money goes 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 provides exposure to many stocks, bonds or other investments at once. An S&P 500 ETF seeks to provide investment results commensurate with the yield of the S&P 500, a list of the 500 largest public companies in the United States. While the average return of the S&P 500 is about 10% per year over the long term, it is much less predictable over a shorter time horizon. The results for this recent three-year period suggest that investors may be experiencing volatility in the stock market.
- 2020: 18.40%
- 2021: 28.59%
- 2022: -18.14%
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Bottom-line
Saving vs investing will be a personal decision which largely depends on how much risk you are prepared to accept. High-yield savings accounts offer low returns with minimal risk while investing in the stock market has the potential for high rewards with high risk.
Credit: www.forbes.com /