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

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 will be a personal decision, where risk tolerance should be a determining factor
  • You should probably prioritize saving over investing if you need liquid cash soon

Not all savings accounts are equal, and some offer different opening minimums, withdrawal rules, fees, and interest rates. People focus on interest rates the most when comparing savings accounts because if your money is going to sit somewhere, why not get the most return for your investment?

Parking money in a high-yield savings account may seem optimal now with the Fed increasing rates. You may have recently received emails from your bank announcing a slightly higher savings rate on some products.

Saving and investing are critical to building wealth, but they’re not the same. A savings account is considered reliable, but ambitious individuals may wonder if they can make their money work harder by investing in the stock market. Here are the significant differences between the two.

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High-yield savings accounts explained

A high-yield savings account is similar to a regular savings account at a brick-and-mortar bank, but they are likely to give you a rate well above the national average APY
. It’s not unusual to see a high-yield savings account advertise a rate 10 to 20 times that of a traditional bank. Note that the FDIC also insures these accounts to provide security to consumers.

Advantages of a high-yield savings account

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

High APY

Typically, people choose a high-yield account because of the higher APY rate compared to 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

Legitimate high-yield savings accounts are insured by the Federal Deposit Insurance Corporation. Up to $250,000 is protected if the bank goes out of business and cannot pay you back. For general safety, wherever you place money, it should be FDIC or SIPC-insured.

Low barrier of entry

Many high-yield savings accounts do not require a high minimum deposit to open an account. Many also have no minimum balance requirement for earning interest on your money. This makes them an accessible option for people who don’t have thousands to deposit. However, note that some high-yield savings accounts offer bonuses if you deposit a certain amount after opening or receive direct deposits in your account.

Disadvantages of high-yield savings account

While these accounts have plenty of upsides, there are a few downsides to keep in mind.

Limited withdrawals

Federal law used to protect savings account holders from penalties on up to six convenient withdrawals or transfers per month. That law, Regulation D, is no longer in effect, but some banks have maintained that policy. Review your savings account terms for any fees associated with withdrawals or transfers to be safe.

Rate changes 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 savings 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 with less risk, but this goes against the fundamentals of investing. Generally, the higher the rate of return, the more risk an investor will take on, and vice versa. Before you make a decision, you should consider the following.

Purpose of the money

The money you save for an emergency needs to be readily available. The money isn’t meant to make you wealthy but to make you feel secure when life pushes you down. Think of it like a spare tire. That tire will get you from where you break down to the nearest mechanic. It’s there for security, to be relied on only for a while. The same philosophy applies to your savings. Make sure you have money ready for you in an emergency, and any money you have beyond that may work harder for you invested in the stock market.

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

Added risks

More risk equals higher potential rewards. There are multiple risks investors accept whether they invest in government bonds or individual stocks. Imagine investing thousands of dollars in Tesla stock on February 2, 2022, only to see your investment drop 39% in value 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?” A less risky option than investing in a few stocks is investing in an index fund or ETF. The SPDR S&P 500 ETF Trust attempts to provide investment results that correspond roughly to the yield of the S&P 500. In the past three years, returns have been:

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

The significant risk of investing money in the market is not knowing when you’ll need it and how much will be available. Diversifying a portfolio will help limit risk. If you’re interested in investing in the market but don’t want to constantly track the headlines, consider checking out’s Investment Kits, which can handle the job for new and seasoned investors.

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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