Investing is one of the top ways to grow your savings and build real wealth. But is there ever a time when a savings account is best to earn interest? If you’re working toward a short-term financial goal like buying a home or going on a vacation, keeping that money in a savings account may actually be a better financial move than investing it—here’s why.
Savings Accounts Are Safer Than the Stock Market
Bank accounts are sometimes best to earn interest because they’re safe vehicles for your money. Savings accounts are FDIC-insured up to $250,000 to protect you from things like theft and bank failure. So there’s basically no risk of losing your money.
However, low risk equals low reward. You’ll earn much less interest from your protected savings account than your 401k or brokerage account. On average, high-yield savings accounts offer an annual percentage yield of 1.50%, whereas the stock market has an average return of 10% per year before inflation.
Bank Accounts Are Best To Earn Interest On Short-Term Savings
But keep in mind that the stock market doesn’t provide high returns every year. During downturns, the stock market can dip and yield negative returns. From 1926 to 2014, the S&P 500 had negative calendar year returns about 27% of the time.
That’s why financial experts recommend that you keep money you may need to access soon, such as your emergency fund, in a savings account. If you had an unexpected expense pop up during a downturn, you’d have to sell some of your investments, which would likely cause you to lose money. So as a general rule, you should keep savings you plan to use in the next few months or years (like a rainy day fund or vacation fund) in a high-yield savings account.
Money market accounts, certificates of deposit, and Series I savings bonds are other low-risk investment vehicles that may be suitable for short-term savings. Keep in mind that CDs and savings bonds usually lock up your money for a certain period of time and charge penalties if you need to withdraw your money early. So CDs and Series I bonds probably won’t work for savings you need constant access to, such as an emergency fund.
Investing Can Help You Achieve Long-Term Goals
If you’re saving for a long-term goal that’s ten or more years away, such as sending your kids to college or retiring, investing is likely a better choice than a savings account. Over a period of a decade or more, inflation would erode the value of your savings if you were only earning 1.50% per year in interest. So you shouldn’t leave money you won’t need for a long time in a low-yield vehicle like a savings account—especially during high inflationary periods like the one we’re in now.
Over a long investment horizon, your savings will have more time to grow and recover from down years. This helps reduce your risk of losing money in the stock market. Buying bonds and mutual funds that contain many different securities instead of investing in individual stocks can also help lower the risk level of your portfolio.
Wrapping Up
When is saving best to earn interest and when should you invest your money instead? Share your thoughts in the comments section below!
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.
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