It's general common sense that saving your money is an essential part of building financial security.
And if you're making the effort, it's smart to stash your money in ahigh-yield savings account. Not only do they offer a higher return than traditional savings accounts, but your money is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
"A savings account isn't high risk," Kaya Ladejobi, a New York-based certified financial planner, tells CNBC Select. But while high-yield savings offer low to no risk, Ladejobi warns that "one shouldn't have expectations of growing their nest egg this way."
Below, CNBC Select speaks to a few financial planners about the risks of putting your money in a high-yield savings account and what to look out for.
High-yield savings offer zero risk
As long as you open a savings account at a legitimate bank that is FDIC-insured, "there is zero risk of capital loss," saysGordon Achtermann, a Virginia-based certified financial planner.
The amount of interest you're earning on your money in a savings account may decrease, but your cash will not.
For instance, the money you put into aSynchrony Bank High Yield Savings or Varo Savings Account will always be guaranteed, but the account's APY will likelygo up and down.
Despite the variable interest rate, it's still much safer to store your money in a savings account than investing in the stock market. Experts generally advise not relying on market returns — especially when it comes to building up an emergency fund.
"The difference between saving and investing is risk," Scott Cole, an Alabama-based certified financial planner, tells CNBC Select. "Don't invest money you are going to need in the short term (one to three years), but beyond three years, some savings should be converted to investing."
Before you start investing, it's important that you have an emergency savings account as well as have your consumer debt under control.
"Savings accounts have their purpose, but it is not meant for investing." Ladejobi says. "It's meant for holding your emergency fund or near-term money that you want to keep safe and accessible."
The catch: 'It's not really a way to increase wealth'
"A savings account is certainly not considered a high-risk way of increasing wealth in the traditional sense," Bryan Kuderna, New Jersey-based certified financial planner and author of "Millennial Millionaire," tells CNBC Select. "However, it's not really a way to increase wealth at all."
No matter how little risk high-yield savings accounts carry, they should only be used for short-term goals, such as saving up for a down payment on a first home or a new car.
Once you have saved up enough money for your short-term goals and an adequate emergency fund (experts generally suggest three to six months' worth of your living expenses), the best way to increase your money is to invest it.
"With a savings account there is essentially no risk of losing money, but your money also will not grow much," Adam Grealish, director of investing at Betterment, tells CNBC Select. "To get higher returns, you need to take more risk, generally by investing in a diversified portfolio of stocks and bonds."
This is why it's especially important to consider why you are putting money in a high-yield savings account. If you have a longer time horizon in mind, keep in mind the rate of inflation. "You are probably giving up returns by keeping it a savings account," Grealish says. If a high-yield savings nets a 1% return, and inflation averages close to 3%, you're not keeping up with the cost of living.
"Don't forget that inflation can eat into that already low interest rate," Grealish says. "Another reason to be wary of cash for longer holding periods."
Bottom line
The key takeaway here is that it is important to make a habit of saving, and a high-yield savings account can certainly help you do that.
When you feel comfortable enough with how much you have saved for your short-term goals and emergencies, you can then think about investing.
"Cash is cash, it is about security not growth," Cole says. "As we always say, 'no risk, no reward,' but having a little cash earning a little more than what their local bank pays is good financial sense."
Information about the Synchrony Bank High Yield Savings Account and Varo Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
While you can grow your money with an HYSA, it's not the best way to generate long-term wealth for retirement because the yield often doesn't keep up with inflation. As a result, working with a broker or robo-advisor to develop an investment portfolio is better for long-range plans.
Is there any risk to a high-yield savings account? ›
While high-yield savings accounts offer high APYs and zero risk, they're not the best way to grow your wealth long-term. That's because your APY can go up and down, and your yield may not outpace the inflation rate.
Should I keep all my savings in a high-yield savings account? ›
Rates fluctuate – Rates may move up and down, preventing you from predicting your return over time. Not the best choice for long-term savings – High-yield savings accounts offer much better interest rates than traditional savings accounts, but often, you won't earn enough over the long-term to account for inflation.
What happens to money in a high-yield savings account? ›
With a high-yield savings account, the interest you're earning on the principal is increased, as is the interest you earn on that interest. How often your interest is compounded depends on the account. Some compound daily, others monthly.
Do millionaires use high-yield savings accounts? ›
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
How much should I keep in a high-yield savings account? ›
For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.
How much will $10,000 make in a high-yield savings account? ›
If you have $10,000 to invest, here's what your earnings would be at different interest rates: After one year with a regular account at 0.42%: $10,042.00. After one year with a high-yield account at 4.50%: $10,450.00. After one year with a high-yield account at 5.00%: $10,500.00.
What happens if you put 50000 in a high-yield savings account? ›
If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.
Can you live off a high-yield savings account? ›
It's possible, but it isn't realistic for everyone. Living off of interest relies on having a large enough balance invested that your regular interest earnings meet your salary needs. Rest assured that you don't need to earn a million dollar paycheck to reach your goal.
Are high-yield savings accounts safe in a recession? ›
It's safe from the stock market: If a recession causes short-term market volatility, you won't lose money on your high-yield savings deposits, unlike investing in the stock market. The APY will be working for you regardless (though it could be lower than the rate you had when you opened the account).
What are the cons of a high-yield savings account? Variable rates. Interest rates on these accounts can and do fluctuate, which means the APY you started with could potentially drop. Keep your eye on such changes and remember that the money is yours; at any time, you can move it to a bank that offers a higher rate.
Can I take my money out of a high-yield savings account at any time? ›
Your best bet if you have extra cash is to put it in a high-yield savings account that can increase your savings but give you the option to withdraw the money if you need to. By law, consumers can withdraw or transfer cash out of a high-yield savings account up to six times per month without paying any fees.
What is the catch to a high-yield savings account? ›
What are the cons of a high-yield savings account? Variable rates. Interest rates on these accounts can and do fluctuate, which means the APY you started with could potentially drop. Keep your eye on such changes and remember that the money is yours; at any time, you can move it to a bank that offers a higher rate.
What is better, a money market or high-yield savings account? ›
A money market account gives you more access to your money in the form of direct checking and ATM withdrawals, but it will generally provide a lower interest rate. A high-yield savings account pays a much higher interest rate, but you have transfer limits and few, if any, accounts let you directly spend money.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Is there anything better than a high-yield savings account? ›
CDs typically offer higher interest rates than high-yield savings accounts — but they work a bit differently.
