Some High-Yield Savings Accounts Pay More Than 5%. Here's Why I'm Not Still Not Putting More in Savings

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As of mid-February 2024, the best high-yield savings accounts offer rates above 5.00%, with some paying as much as 5.50% APY. That’s a pretty competitive rate and is well above the rates you could get just a few years ago when banks were paying 1.00% or less.

Despite the fact that savings accounts are offering higher yields than they have in years, I’m not putting even $1 extra into my savings accounts. Here are a few reasons why.

1. I have enough short-term savings already

One big reason why I’m not putting more money into my savings accounts is because I already have enough saved for my short-term goals.

I have an emergency fund, as well as accounts for expenses like vacations and car repairs. I replenish these accounts as needed, but I don’t intend to put any extra money into any savings accounts just because rates are higher than usual right now.

The simple reason my savings won’t be growing is that I don’t believe a savings account is a good investment — even with rates at 5.00%. I’d rather invest any money I won’t need in the next few years. If I use my brokerage account, I can reasonably expect to earn a 10% average annual return over the long run. But if I divert it to savings, I’d earn around half that amount, at best.

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2. Savings account rates aren’t guaranteed to last

Even if I did believe that today’s competitive rates offered a great chance to invest in a risk-free investment paying upward of 5.00%, I still wouldn’t put any extra money into savings.

That’s because savings accounts have variable interest rates. If rates drop, the return you get on money in savings will decline, too. I believe rates inevitably will be dropping soon, as they’ve been trending higher than they have during most of my adult life. Rates were driven up because the Federal Reserve (the U.S. Central Bank) took steps to fight pandemic-related inflation. But inflation is cooling, and the Fed has signaled rate cuts may soon be coming.

When rates start to drop, the 5.00% APYs will be gone very quickly. If I wanted an investment offering this generous return where I couldn’t lose money, I’d put my cash in a certificate of deposit instead of savings. CDs tend to offer slightly better rates than high-yield savings accounts do anyway, and the rate is guaranteed or locked in for the CD term. So even if rates fall in the coming months or years, the CD would still pay out the rate I was promised when I signed up.

Now, CDs do require you to lock up your money — you can’t take it out any time as you would with a savings account. But if I was hoping to put money away for purposes of investing rather than just saving for short-term goals, that wouldn’t matter. I’d be better off with the CD where my rate was guaranteed.

Ultimately, if you have enough money in savings for anything you’ll need to do in the next few years, the rest of your spare money that’s earmarked for long-term goals should be in the stock market rather than in a savings account (even one paying a decent rate). But if you do want to make a risk-free investment that gives you the chance to benefit from today’s higher-than-normal rates, a CD may be a better bet due to the fact your rate is guaranteed.

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