Is a High-Yield Savings Account Really the Best Place for Your Extra Cash?

Let’s be real: when you spot your money multiplying on its own, it’s easy to let out a happy sigh and let things ride. High-yield savings accounts can give you that fuzzy feeling—watching your balance creep upward with (almost) zero effort. But wait! Have you ever caught yourself wondering, “Could my cash be doing more heavy lifting somewhere else?”

It’s hardly shocking that high-yield savings accounts are getting a lot of love lately. Some digital banks like Ally are waving around up to a 4.25% interest rate—light-years ahead of those yawn-inducing old-school accounts. And then there are places like Varo and Bask Bank, boasting APYs as high as 5%. Is it just me, or does that sound almost too good to be true?

Stack those numbers against the pitiful national average (at the time of this writing, a blink-and-you’ll-miss-it 0.43%), and it seems like tossing your spare cash into a high-yield account is a slam dunk. But—spoiler alert!—if you zoom out and consider your bigger financial picture, there might be some juicier ways to grow your stash.

High-Yield Savings Accounts Are the Trend Right Now

If you haven’t noticed, borrowing money (for people and for banks) just got pricier. High interest rates are everywhere you turn. That’s partly why banks—including big names like Ally—are tempting new savers with shiny-high APYs. They want your cash, and they want it now.

But good things rarely last forever—especially in the world of finance. The Federal Reserve is widely expected to chill out and maybe even start lowering rates in early 2024. Translation: those super-attractive APYs on your high-yield savings probably have a “limited time only” tag.

So, yeah, today’s deals are sweet. High-yield savings accounts will pad your balance passively, a bit like money market accounts or bonds. But—and it’s a big but—these rates are variable. As soon as the market turns, those dream rates can take a nosedive. If you’re banking on big-time, long-term growth, you’ll need to look elsewhere.

“Although yields are quite attractive at the moment, I wouldn’t want to keep all my money in a high-yield savings account if I’m planning for the long term,” says Amy Arnott of Morningstar. She’s got a point; historically, investments like equities tend to beat savings on returns over the years.

Stocks, Mutual Funds, and ETFs Offer Stronger, Long-Term Gains

It’s no secret that savings accounts are the turtle in the race—steady and safe. But if you want the rabbit’s prize? You look to stocks, mutual funds, and ETFs. Over the past decade, the mighty S&P 500 has averaged north of 12% a year. Sorry, high-yield savings, but there’s just no contest.

Tim Steffen, who’s in advanced planning at Baird, swears by stocks for young investors. “You have decades to recover from any market volatility you encounter,” he points out. (Basically: you’ve got time to let your money stretch its legs, so let it run.)

Not a fan of roller-coaster markets? There’s hope. Certificates of deposit (CDs) and money market funds can lock in your rate for a chunk of time, sometimes even besting what you’ll find in those much-hyped high-yield savings accounts.

The Smartest Use for High-Yield Savings: Your Emergency Fund

Let’s set the record straight: high-yield savings shine brightest in one arena—your emergency fund. The old saying goes, “Save enough to cover three to six months of expenses.” (And yes, sometimes following sage advice is actually the cool thing to do.)

No matter what interest rates are doing, the big draw here is easy access. Your savings account is there for you at three in the morning when disaster strikes. Forget complicated withdrawals or waiting for stocks to sell—it’s instant support when life does its worst.

Take Adam Stockton from Curinos, for example. One weekend, his water heater decided to create an indoor pool in his basement. Was he thrilled? Of course not. But thanks to his emergency fund (yep, in a savings account), the drama ended at inconvenience, not a financial meltdown.

Newsletter

Ready to turn your financial FOMO into financial savvy? Give your inbox a weekly boost with Dollar Scholar—tips, nuggets of wisdom, and the occasional irresistible animal photo included (because who says learning can’t be adorable?).

Sign Up

By subscribing, you agree to receive newsletters and promotions from Money and its partners, and consent to Money’s Terms of Use and Privacy Notice.

MORE FROM MONEY:

• These Are the 3 Best Money Moves for September 2023
• You Can Put a Lot More Money Into Your HSA Next Year
• The Student Loan Pause Is Officially Ending — Here’s What to Expect