As interest rates rise, it might be time to reconsider whether you’re keeping your money in the right account to reach your goals.
You may not earn as much as you would investing in the stock market — subjecting your money to market fluctuations — but the interest you can earn from a high-yield savings account, CD, or money market account can add onto the money you save toward an emergency fund or short-term financial goal. And any of these products can add more value than stashing cash at home, or in an interest-free account, where it will only depreciate in value.
To show you exactly how much today’s rates can offer, we did the math — using a $10,000 balance to illustrate how your money can grow in one year. While we know that’s not a realistic starting balance for many people, especially those just starting to save, we use it to show how much of a return today’s rates can add up to — and what you could miss out on by leaving your cash where it won’t earn anything.
High Yield Savings Account
High yield savings accounts are one of the best places to keep money you want easy access to, like an emergency fund. But you can also use a high-yield savings account to set aside extra money for a second car, to start a business, or safekeeping money you’ll use to make an investment — not just for emergencies, says Ian Wild, a certified financial planner and founder of All-Pro Advisors, a financial planning and investment management firm in Pittsburgh, Pennsylvania.
Right now, savings account rates are increasing. After pandemic-era lows around 0.5%, the best high yield savings account rates today are around 1% or more. But they’re still relatively low.
“Even though high yield savings accounts aren’t paying very much, since interest rates have been at historic lows for quite some time, some interest is better than nothing,” says Ayesha Selden, a certified financial planner and franchise owner of Ameriprise Financial Services Inc. in Philadelphia. And in a rising rate environment like today’s, choosing a bank with a competitive APY can be a good indicator that your account will keep up with increasing rates over time.
Let’s say you deposit your $10,000 into a high yield savings account with a 1.01% APY today. Savings account rates are variable, but for this example, we’ll assume that rate stays the same over the next 12 months.
In one year, you’ll have $101 more in interest for a total $10,101 in your high yield savings account.
These accounts offer fixed interest rates with fixed terms (often one, three, or five years). While CDs are less accessible than savings accounts — in many cases, you’ll pay penalties to withdraw early — you’re guaranteed the return when your term ends, regardless of market fluctuations or lower rates.
There are a few ways you can make your CDs more liquid. No-penalty CDs offer slightly lower fixed rates, in exchange for more access to your savings, for example. You may also set up a CD ladder, in which you open multiple CDs with varying terms, which you can roll over to take advantage of higher rates while also maintaining some liquidity.
Here’s how much you can earn with $10,000 in different CDs, given today’s rates:
Many of the best 1 year CDs today offer rates around 2% APY. If you deposit a $10,000 into a fixed 1-year CD at a rate of 2%, you’ll have $10,200 at the end of its term, slightly more than a current high-yield savings account.
3 Year or 5 Year
If you choose to lock your money into a CD for longer than a year, you can earn even higher returns. Many 3 year CDs offer APYs around 2.75% right now, and 5 year CDs offer the highest of all, with many around 3% APY.
If you invest $10,000 into a 3-year CD with a 2.75% APY, you’ll have $10,848 at end of the term.
Putting the same money into a 5-year CD at a higher rate of 3%, you’ll have $11,593. Usually, the longer the term, the higher the APY.
Money Market Account
Money market accounts are also good for short-term goals, and MMAs currently earn about the same interest as high-yield savings accounts.
Money market accounts are very similar to savings accounts, too. One main difference is even easier access to your money: many MMAs offer debit cards or check-writing abilities to make withdrawals. But they’re also more likely to require higher minimum deposits than high yield savings, if you want to earn the highest rates available.
Right now, many of the best MMA interest rates are around 1.5%, though some rates depend on your deposit.
If you put $10,000 in an MMA account today at a 1.5% APY, you would have $10,150 in a year. Like with high yield savings accounts, that’s assuming the rate remains the same over a year, because money market accounts also have variable APYs.
Alternatives to High Yield Deposit Accounts
High yield savings accounts, CDs, and money market accounts are all low-risk options to store your money while earning a solid return. Though the rates you’ll earn aren’t sky-high, they can add a bit more to your overall balance and make a difference over time.
But these aren’t the only places to keep your extra funds. Using the same $10,000 deposit example, here’s how some other options — offering both higher and lower returns — compare.
Traditional Savings Account
Traditional savings accounts are typically offered by large brick-and-mortar banks or financial institutions and earn very little, if any, interest. These accounts are FDIC-insured, so they’re safe vehicles for your cash, and they may offer in-person withdrawals at branches. But they’re more likely than high yield savings accounts to charge fees and have minimum deposit requirements.
Many traditional savings accounts offer APYs as low as 0.01%. If you deposit $10,000 into a savings account with an APY of 0.01% today, you would earn just $1 over 12 months.
Stashing Money Under a Mattress
For some people — especially those wary of the banking system — it may seem safer to keep money in your house in case of emergencies, but there are plenty of downsides.
To start, it can be risky. Money you keep at home is not FDIC- or NCUA-insured, and you could lose it in cases of home dangers like fires or burglaries. Plus, unlike in a savings account, money under a mattress or in a cabinet won’t earn any interest over time.
“The risk is that your money isn’t keeping up,” says Wild. As prices increase over time with inflation, your $10,000 will only be $10,000, and that amount may actually be valued at less in a year. The same is true for most checking accounts. You won’t earn any interest, but you’ll have access to your money when you need it.
A brokerage account is an investment account, and best for long-term financial goals. The money you contribute to a brokerage account is susceptible to stock market fluctuations, so you should not hold your emergency fund in a brokerage account.
However, investment accounts do offer much higher returns over time than deposit accounts. After you’ve saved the amount you feel comfortable having in case of emergencies, it’s a good idea to start putting money in an index fund, and contributing to a retirement investment account like a Roth IRA.
Using our same example, say you have $10,000 to invest today.
In just one year’s time, you may lose money on your investment. In fact, you would have more than a 6% loss over the past one-year period investing in the S&P 500, according to S&P Dow Jones Indices. But over a longer period of time, you’re more likely to see a much higher rate of return. The same index shows that over the past 10 years, long-term investors have seen an 8% annualized growth.
Saving Your Money in Today’s Economy
Before you open a new account, take the time to figure out which will help you earn the best return and meet your savings goals. For example, you may choose a 1-year CD to lock away the down payment for a home you’re planning to buy in a year. Or maybe you’re just starting to build your emergency fund and want to take advantage of rising high yield savings account rates.
Start by assessing your financial situation and goals to determine which account is best for you. A mix of low-risk savings accounts and accounts with higher return potential can help you build a diverse portfolio to set you up for financial success.
And remember, you don’t need a large lump sum to get started. In fact, experts recommend setting a savings goal and then setting aside whatever amount you can each month to build up your balance over time. Automated transfers can make the process even more seamless, so you don’t even have to think about the contributions you’re making.