Why Millennials Are Opting for High-Yield Savings Accounts Over Investing
Written by
John Csiszar
Edited by
Gary Dudak
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High-yield savings accounts are a relatively new creation, offered almost exclusively by online banks due to their lower overhead. Currently, they pay roughly 10x the yield of the average traditional savings account, with some APYs topping 5%.
This is undoubtedly one of the main reasons why many millennials are opting for high-yield savings accounts over investing in the stock market, according to Stefanie O’Connell Rodriguez, host of Real Simple’s “Money Confidential” podcast. But, what are the real advantages of high-yield savings accounts, and what are the consequences of investing in them instead of the stock market? Let’s find out.
Advantages of High-Yield Savings Accounts
The advantages of high-yield savings accounts are plentiful, especially given the current interest rate situation. High-yield savings accounts carry $250,000 in FDIC insurance, and many banks boost that insurance on their own into the millions of dollars. This makes them as safe as any other accredited bank account.
With the Fed having boosted interest rates significantly in the past few years, yields on many accounts now top 5% annually, a very high rate for what’s essentially a guaranteed product. High-yield savings accounts are also liquid, with money generally being easily accessible through ATM cards and/or online transfers.
How Much Can You Earn in a High-Yield Savings Account?
According to the Federal Reserve, the average savings account yield as of Mar. 18, 2024 was just 0.47%. If you sock away $100,000 into an account with that APY, you’ll earn just $470 per year. But if you earn 5% on that $100,000, as you could with a high-yield savings account in the current environment, you’ll generate $5,000 per year in income instead.
It’s important to understand, however, that the interest rates on high-yield savings accounts are not fixed. As market rates fluctuate up and down, so too do HYSA yields.
For example, during the coronavirus pandemic in 2020, rates on HYSAs were slashed to the 0.80% area. A $100,000 investment at that level would only generate $800 in annual income, a far cry from the $5,000-plus you could earn today.
While HYSA rates were still roughly 10x those of traditional savings accounts at the time, on an absolute basis, the payouts were very low — and this could happen again in the future if market rates fall.
How Does This Compare With the Stock Market?
Over the long run, the stock market reportedly averages an annual return of approximately 10%. At this rate, your money will double on average about every 7.2 years, vs. every 14.4 years in a high-yield savings account at current rates. Over the long run, this seemingly small 5% advantage would create a tremendous discrepancy in how much you could earn.
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If you were to save $500 per month in a 5% HYSA for 35 years, for example, you’d end up with a nest egg of about $568,000 — not bad, considering your investment is among the safest available. But if you instead put that $500 per month into the stock market, your ending account balance would be closer to $1.9 million.
In other words, you’d end up with 234% more in your account by investing in the stock market, amounting to over $1.3 million extra. That’s a life-changing amount of money.
And here’s the thing about risk in the stock market that many people overlook — the longer you keep your money invested, the lower your risk actually becomes. There has never been a 20-year period, for example, in which the stock market has actually lost money. The longer you can stay invested — while continually contributing to your account — the more the daily ups and downs of the market will smooth out, resulting in less overall risk.
What’s the Best Course of Action for Millennials?
On an absolute basis, a 5% yield can’t compete with the 10% long-term average annual return of the stock market. However, this isn’t exactly an apples-to-apples comparison. While the stock market offers the potential for higher returns, it’s also much more volatile. For some investors, a guaranteed 5% yield is worth the tradeoff for a potential 10% return. However, this shouldn’t be the case for long-term investors.
Even with the high rates HYSAs are currently paying, savings account money should be dedicated to short-term needs. For example, if you’re saving up a down payment for a home or looking for somewhere to stash your emergency fund, an HYSA is a great choice. But for long-term wealth building, such as your retirement nest egg, an HYSA will leave you behind.
This is because even with a 5% yield, an HYSA provides close to a negative real return for many investors. Once you back out the current 3.2% inflation rate, your real return drops to just 1.8% — and that doesn’t even factor in taxes, which could bring your net earnings rate to less than 1%, and potentially a negative number.
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