Should You Invest Your Money or Put It in High-Yield Savings?
Written by
Andrew Lisa
Edited by
Molly Sullivan
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In the decade after the Great Recession, an endless bull stock market coincided with record-low savings yields. Today, the tables have turned — the stock market is down and many banks are paying more than 4% for savings deposits.
So which is the better place for your money? The answer, in most cases, comes down to time.
“Saving is for short-term financial goals like emergency funds and purchases you plan to make in the next few years, such as buying a car or taking a vacation,” said Laura Adams, MBA, a personal finance expert with Finder.com. “It’s best only to invest money earmarked for your long-term goals, such as purchases you want to make three to five years in the future. They might include putting a child through college, buying a home, starting a business, or retiring.”
A healthy personal finance portfolio includes a blend of both savings and investments. Here’s how to strike the balance that’s right for you.
The High-Yield Savings vs. Investment Scorecard
Like anything else, there are pros and cons to both investing your money and saving it in a high-yield deposit account. Consider the following:
- Savings are held securely in an insured bank or credit union account that pays a modest return in exchange for your deposits. Today’s high-yield savings accounts pay north of 4%, more than 12 times the national average rate of 0.33% and around 70 times better than last year’s average of 0.06%.
- Investing is when you risk losing some of your money in exchange for the chance to grow it at a much better rate. When you invest, you purchase assets like stocks or real estate, which have the potential to appreciate but could also lose value.
- Money in a savings account is free to access and instantly available — you can initiate an internal transfer with a few clicks and have the cash in your checking account immediately.
- Investments — particularly complex investments like real estate — can take time and cost money to liquidate if you need to convert them to cash. More liquid investments like stocks tend to be more volatile while more conservative investments like bonds typically have maturity terms that penalize premature liquidation.
Investments Play Offense, Savings Play Defense
Brian Davis, real estate investor and founder of SparkRental, came up with a handy analogy familiar to anyone who understands sports.
Imagine dividing your money into two squads on the same team. Your investments’ job is to score points for your team. The job of your savings is to protect your team from giving up points.
“While you set aside cash savings as a defensive measure, you invest to build wealth — playing offense, if you will,” Davis said. “Investments come with more risk and volatility, but far higher returns in the long run. Some investments are relatively stable, but aren’t very liquid, like real estate. The more money you invest each month, the faster you build wealth and passive income.”
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Look Beyond Liquidity
If they get into a pinch, modern investors can sell shares and transfer the cash from their brokerages to their checking accounts almost instantly. So if stocks and ETFs are fully liquid or close to it, why keep money in savings when those deposits could be in play on the market earning real gains?
Because gains are not a foregone conclusion for any investment, certainly not for one as volatile as stocks.
“High-yield savings accounts offer the security of FDIC insurance,” said Dennis Shirshikov, head of growth at Awning.com and a professor of finance, economics and accounting at The City University of New York.
Back to Davis’ analogy, federally insured deposits play defense and guard your principal, even if their gains trail inflation.
Investments Often Tank When You Need Your Savings the Most
Your S&P 500 ETF, on the other hand, is all offense.
Sure it gained nearly 50% over the last five years, but there were ups and downs along the way.
In the last five years, most people were in greatest need of their savings in March 2020. If you had your emergency fund invested in the stock market then, one-third of it would have been missing just as you lost your job and needed to buy supplies to get through quarantines and shut-downs.
Gains vs. Guarantees
In short, investing vs. saving comes down to gains vs. guarantees.
Every dollar you save, even in a high-yield account, is a depreciating asset whose buying power can’t keep pace with the diminishing effects of inflation — but it will be there when you need it because it’s insured against losses.
On the other hand, every dollar you invest has the potential to double in seven years according to the Rule of 72 — but not if you’re forced to lock in losses by selling during a down market because you don’t have enough money saved to cover an emergency.
It’s Expensive To Turn Investments Back Into Money
Even if you defy Murphy’s Law and your investments are up when you need money quickly in the face of a crisis, you’ll still pay to convert your holdings to cash despite not having sold them for a loss.
That’s because you have to pay capital gains taxes when you profit from selling investments.
While capital gains taxes typically max out at 15%, you might pay up to 20% depending on your income — and that’s presuming you’re paying the more forgiving long-term rate for investments held for more than a year.
If you sell an investment you’ve owned for less than a year, the short-term capital gains rate applies and it’s taxed as ordinary income at rates as high as 37%.
So, whether you pay capital gains taxes on profits or sell your holdings at a loss, it will cost you to access savings you have tied up in investments. On the other hand, you can access the cash in your high-yield savings account any time you like, free of charge — but that money won’t have the chance to grow as much.
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