You'll often hear that it's important to have money set aside for emergency expenses, like home repairs, car repairs, or medical bills. And the best place to put that cash is a savings account. That way, you'll have access to it whenever you need, and you won't have to worry about your principal contribution losing value.
But while it's good to have a nice amount of financial protection from emergencies, you don't want to make the mistake of putting all of your money into a savings account. Even when interest rates are higher like they are today, they might pale in comparison to the returns you manage to generate by investing your money in a brokerage account.
Don't sell your money short
Putting your money into a savings account means keeping it safe. Investing, on the other hand, carries risk. But in exchange for that risk, you might manage to generate a much higher return on your cash than what a savings account will pay you. And in the long run, that could really make a difference.
These days, you might be able to score a 4% return on your money in a high-yield savings account. For a risk-free deposit, that's not a bad deal.
But here's something to consider. The S&P 500 index, which consists of the 500 largest publicly traded companies, generated an average yearly return of 11.88% between 1957 and the end of 2021, according to Investopedia.
Now, let's be a little bit more conservative than that and assume your portfolio only delivers an average yearly return of 8%. That's still a lot higher than the 4% you might get on the money you keep in a savings account. And that could make a world of a difference over time.
In fact, let's say you have $10,000 in cash beyond what you need for your emergency fund. If you keep that money in the bank for 30 years and score an average annual 4% return on it, you'll end up with around $32,400. But if you invest that $10,000 in a brokerage account and your portfolio delivers an average annual 8% return, in 30 years' time, you'll be sitting on about $100,600. That's a difference of more than $68,000.
It pays to take on some risk
Any money you have earmarked for emergencies, or for near-term goals, like buying a car or home, should be kept in a savings account. But if you have money you're trying to save for long-term goals, like retirement, then investing it could really be a far more lucrative choice.
And if you're not good at picking stocks or you feel you don't have the knowledge needed to do so, you can invest in exchange-traded funds instead. These allow you to put your money into the broad market so you're not taking on the risk that comes with buying individual companies. And it may make you more comfortable with the idea of investing in the first place.
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FAQs
You'll earn plenty of interest -- if you're using a high-yield savings account. Let's start with the good news. Interest rates are high right now, so if you have a lot of money in your savings account, you could be earning sizable interest payments each month.
What happens when you keep your money in a savings account? ›
A savings account is a type of bank account designed for saving money that you don't plan to spend right away. Like a checking account, you can make withdrawals and access the money as needed. But with savings accounts, the bank pays you compounding interest just for keeping funds in your account.
What is a savings account used for in EverFi? ›
- Savings accounts are best used to store money for longer-term goals. Savings accounts allow an unlimited amount of withdrawals each month.
Should I leave all my money in a savings account? ›
Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account. After all, most high-yield savings accounts limit withdrawals to only six per month, so a checking account is typically a better place to store your spending cash.
Is it safe to keep large amount in savings account? ›
Low-Risk: Savings accounts are low-risk investments, which means that you don't have to worry about losing your money. Unlike stocks, bonds, or mutual funds, savings accounts don't fluctuate in value, making them a reliable place to keep your money.
How much is too much to keep in a savings account? ›
So, regardless of any other factors, you generally shouldn't keep more than $250,000 in any insured deposit account. After all, if you have money in the account that's over this limit, it's typically uninsured. Take advantage of what a high-yield savings account can offer you now.
Why use a savings account everfi answers? ›
Savings accounts allow an unlimited amount of withdrawals each month. Savings accounts may require you to maintain a minimum balance to avoid paying a fee. Savings accounts are best used to store money for longer-term goals.
What is savings account meant for _________________________? ›
The primary objective of a savings account is to encourage individuals to save money over some time, providing them with a safe and accessible place to keep their funds.
What is savings account money for? ›
A savings account is a good place to keep money for a later date, separate from everyday spending cash, because it offers safety, liquidity and interest-earning potential for your funds. These accounts are a great place for your emergency fund or savings for shorter-term goals, such as a vacation or home repair.
How much cash can you keep at home legally in the US? ›
The government has no regulations on the amount of money you can legally keep in your house or even the amount of money you can legally own overall. Just, the problem with keeping so much money in one place (likely in the form of cash) — it's very vulnerable to being lost.
So if you keep your retirement nest egg in a savings account, you might lose out on the higher returns you need to outpace inflation over time. Also, a savings account won't give you any sort of tax break on your money.
Is $20,000 in savings good? ›
Depositing $20,000 in a savings account is wise when you have a plan for the money, such as a near-term expense or rainy day fund. For long-term goals, like retirement, you might be better served by opening a brokerage account or certificate of deposit (CD).
Is it worth keeping money in a savings account? ›
For the emergency stash, most financial experts set an ambitious goal of the equivalent of six months of income. A regular savings account is "liquid." That is, your money is safe and you can access it at any time without a penalty and with no risk of a loss of your principal.
Is it safe to keep money in savings? ›
Deposit accounts—like savings accounts, CDs, MMAs, and checking accounts—are a safe place to keep money because consumer deposits are insured for up to $250,000, either by the FDIC or NCUA.
Is there a risk of losing money in a savings account? ›
Bank or credit union failures
If your high-yield savings account is held at a federally insured financial institution, your deposits are protected up to $250,000. But if you have deposits that exceed this limit, you risk losing the additional amount if the bank or credit union fails.
Can a bank lose your savings account? ›
Because of this, it is possible for a bank to lose your money. When an institution is no longer able to provide enough liquidity for its depositors and creditors, the FDIC takes action to close the bank. However, most reputable banking institutions protect customer funds against this circ*mstance through the FDIC.
