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 a high-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,” says Gordon 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 a Synchrony Bank High Yield Savings or Varo Savings Account will always be guaranteed, but the account’s APY will likely go 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.”
