3 Reasons Not to Open a High-Yield Savings Account, Even With Rates at 5.36%

High-yield savings accounts combine flexibility with high interest rates to help you grow your savings. Today's high-rate environment has lifted savings account rates to two-decade highs, with the best accounts currently paying 5.36%. 

While I'm a big fan of savings accounts, I also know they have limitations. They can protect funds you've saved for immediate purposes -- like moving across the country -- but they won't grow your money substantially, at least not like the stock market can. If you're wondering if a savings account is the right vehicle for you, here are three drawbacks to consider. 

1. Savings accounts have variable rates 

Savings accounts have variable APYs. While that doesn't mean savings rates fluctuate every day, it does give your bank or credit union the right to change your account's APY at any time. 

It might not be long before we see an industry-wide drop on rates. Currently, rates are mostly at a standstill, as financial institutions await the Federal Reserve's next rate decision. While the federal funds rate doesn't necessarily set interest rates for savings accounts, the two typically move in tandem. If the central bank makes at least one rate cut this year, a chain reaction of rate cuts on deposit accounts will likely follow. 

Our Picks for the Best High-Yield Savings Accounts of 2024

American Express® High Yield Savings APY 4.25% Rate info 4.25% annual percentage yield as of July 14, 2024 Min. to earn $1 Open Account for American Express® High Yield Savings Member FDIC.	APY 4.25% Rate info 4.25% annual percentage yield as of July 14, 2024	Min. to earn $1
Citizens Access® Savings APY 4.50% Min. to earn $0.01 Open Account for Citizens Access® Savings Member FDIC.	APY 4.50%	Min. to earn $0.01
Bask Interest Savings APY 5.10% Min. to earn $0 Open Account for Bask Interest Savings Member FDIC.	APY 5.10%	Min. to earn $0

Of course, no one can predict where rates will be in a few months. But if you have savings that aren't earmarked for a near-term purpose, it might be wise to move your money into a fixed-rate investment -- like a CD. 

2. Certificates of deposit could earn more interest 

Like high-yield savings accounts, certificates of deposit (CD) have been a popular deposit account in 2024. Unlike savings accounts, however, CDs have fixed interest rates, which can lock in today's elevated rates for a longer period. 

While many of the best CD rates are currently on shorter terms, like three to 12 months, long-term CDs might offer a better opportunity, mainly because they can lock in rates for longer periods.

For instance, you could earn about $660 in interest when you deposit $25,000 in a 6-month CD with a 5.35% APY -- currently, the highest APY for that term. While that would give you a quick burst of passive income, a 5-year CD with a 4.30% APY would offer you more than eight-times that amount in interest -- about $5,858.

Of course, you have to keep your money locked up in the CD for the full 60 months to earn that much interest, or risk paying an early withdrawal penalty. But, if you're confident you can part ways with some of your savings temporarily, a CD would freeze your rate, thereby preventing it from being slashed from industry-wide rate reductions. 

3. The stock market is better for the long haul 

Savings accounts aren't great choices when you're saving for your future. Even when their rates pace (or slightly outpace) inflation, they're not near as good as growing your money as other investments, like stocks. 

Over the last 50 years, the stock market has averaged an annual return of roughly 10%. At that rate, you could become a millionaire in about 37 years by investing $250 monthly. Even if you were to deposit only a lump sum, say $10,000, you could still grow it to $340,000 in 37 years if your average annual return was 10%. 

Even at today's great rates, savings accounts can't compete with the growth opportunities in the stock market. While savings accounts are safer and don't come with market risks, storing a large sum in one might not make financial sense, especially if you're years from retirement and have time to bounce back from market downturns. 

Of course, it's not always about earning the most money. Sometimes, you need cash that isn't tied up in investments, and savings accounts are the right instrument for this. While watching money grow in a savings account can be as boring as watching paint dry, they're a lot more thrilling today than they were in 2021. Storing cash in a high-yield savings account can at least help you outpace inflation, especially if you manage to snag one with a 5.36% APY.