High-Yield Savings vs. Stocks: Where Should You Put Your Money Now?

A lot of people hate that borrowing rates have been higher than they've been in years, but interest rates closer to historical averages also mean that savings accounts are paying a meaningful yield.

If you have extra cash and are looking for a better place to stash it than your mattress, you have several options. Two primary options to consider are high-yield savings accounts (HYSAs) and the stock market.

The argument for a high-yield savings account

In theory, we should all have savings accounts, right? So why wouldn't you use a high-yield savings account to get more money for your savings if it's there for the taking?

On one hand, there are savings accounts that pay pitiful rates, and on the other, some savings accounts offer APYs of 4.00% to 5.00%, depending on the bank and your deposit. SoFi, for example, offers up to 4.60% APY with any deposit, even just $1. If you want to earn more, CIT Platinum Savings offers 5.00% APY for balances of $5,000 or more.

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

Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
American Express® High Yield Savings APY 4.25% Rate info 4.25% annual percentage yield as of June 28, 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 June 28, 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

Why would you choose anything else?

Should you also invest in stocks?

The question really isn't should you choose a high-yield savings account or not, it's should you also choose stocks? You should never leave yourself with no liquid cash, under any circumstances. Using your stock brokerage account as a savings account could leave you in a mess if the market slumps or you need cash for a sudden emergency.

But the question of whether you should also buy stocks is an important one. Over the past five years, the S&P 500 index has gained about 87% in value, which would take an investment of $10,000 in stocks to a value of $18,700 today.

In a high-yield savings account, assuming the rate was steady at 5.00% for five years (unlikely), you'd only have earned $2,762.82 in interest in the same period.

If you're not risk averse, and you have a time horizon that's long enough to consider stocks as a part of your portfolio, you should also strongly consider putting some of your money into stocks.

The downsides of stocks and savings accounts

I'm a stock investor, full disclosure. I love stocks. I think they're neat. But they're not for everyone. They come with risks. However, high-yield savings accounts aren't perfect either, even though I think everyone should have one. Let's look at the drawbacks of both.

Why not buy stocks?

Stocks are risky, and they're in no way insured, so if you put money in, there's no promise money will come back out. They're not ATMs, they're investments in real companies in the real world, some of which will fail. So, when you make a stock investment, you have to know what you're buying.

This takes a significant time investment since you want to become cozy with the company's fundamentals. Even then, sometimes unexpected things happen and you'll lose everything. You need a long investing time horizon to compensate for those losses.

Drawbacks to savings accounts

High-yield savings accounts are basically can't-lose propositions. Except that you could put excess savings to work someplace else for a higher return. Currently, in a high-yield savings account, you'll be hard-pressed to find a safer bet with fewer requirements.

However, if the Federal Reserve cuts interest rates later this year as expected, your HYSA's rates will follow. HYSAs have floating interest rates. Any move from the central bank will reflect on your savings returns. This is why many people choose to lock in their rates with certificates of deposit.

For now, there's nothing wrong with a 5% return from a HYSA. They're insured up to $250,000 by the FDIC, so you won't lose your money if the bank fails. And if interest rates change, you can use that compounded interest you earned to buy something else.

It's not a question of HYSA or stocks

The question really should never be HYSA or stocks. It should simply be about how you'll diversify your HYSA today. Stocks are one way to do it, if your time horizon is long enough that you can afford to ride out the downturns.