Should I Put All My Money In A High Yield Savings?
Interest rates on saving accounts are currently continuing to climb with some banks offering north of 4% APY. Some may think, “Those rates are better than most of my investments have done over the past year!” So, should you stop your 401(k) contributions, cash out your other investments and put it into these types of accounts? The answer is most likely no.
A Brief Personal History Lesson
I started in banking in 2006. At that time, I was told to look out for people who had higher balance savings accounts and look for opportunities to have them open a money market account. Around this point in time, money markets were paying about 5% APY. I thought those rates sounded awesome and you just let your money make more money so easily! This may have been my first real world algebra problem where I was backing into how much I needed to put into this account in order to stop working. However, from mid 2007 until about March 2009, money market rates continued to plummet nearing zero. This was a quick lesson about rates not being fixed or guaranteed. In case you were wondering, I never scored the easy win to stop working and replace my income. I’m building my savings the tried and true boring way by working and putting some back as I go!
Rate Fluctuations
Savings account rates are not fixed for any length of time. They can fluctuate quickly, so you can’t really bank on getting 4% for the next however many years (same with money market mutual funds that are yielding close to the same). You really need to determine how long until you may need that money and find financial instruments that align with that timeframe. For example, your emergency fund is an excellent account to place into a high yield savings or money market type of instrument. You may need it tomorrow if an emergency hits. It would be liquid and ready to use in a very short period of time.
Long Term Investing
High yield savings accounts aren’t really long-term types of investment vehicles. I wouldn’t change a long-term strategy for the rates you’re seeing today. I do however recommend to clients who have short term money that’s not getting at least this level to look at options such as money market mutual funds or these higher APY savings accounts.
I’m all for scoring higher returns with short term money that isn’t hitting around the 4% mark as of the time of this post. But if the Fed does their job to curb inflation and starts to bring rates down, then you’ll see these higher APY’s start to go down as well. Again, take it while you can get it with emergency funds or smaller savings accounts that are needed in the nearterm (e.g. vacation fund), but I wouldn’t encourage clients to cash out of investments to pick up these rates.
Purchasing Power
It’s important to think through purchasing power as well in this decision. You know this all too well that a $1 a year ago doesn’t buy the same amount of goods and services today. That’s due to inflation and that’s how we measure purchasing power.
The latest inflation rate came in at 6.41% and you’re being offered 4% on your savings. That means you’re still losing 2.41% in purchasing power if inflation holds true and you get your 4% throughout the year. (4% - 6.41% = -2.41%)
To put in more concrete thoughts. Let’s say you paid $50 to get your oil changed one year ago. Based on the inflation number above, generally speaking, it now costs $53.21. If you put $50 in a savings account one year ago so that you could get your oil changed again that time next year and you earned 4%, you’d have $52. You’re short $1.21. Now add some zeros on that to say you need $50,000 a year in retirement and you can see where the math just doesn’t add up to work over the long run with these kinds of rates.
Stopping 401(k) Savings
I would not advise a client to stop saving for retirement in lieu of obtaining these high yield savings rates. Accounts such as a 401(k) are long-term savings accounts. Not only that, but if your employer offers a match, you automatically have a return! For example, if you put in 4% and your employer matches 4%, congrats! You just doubled your money by doing nothing more than saving. Even if a match isn’t on the table, the long-term historical performance of equities is much more attractive, and they are usually needed to retire successfully.
So take advantage of these rates/accounts where appropriate, while you can get them. But don’t give up on the power of investing in the stock market just because short term rates may appear to be “attractive”.
If you have more questions on your specific saving and investing strategy, I’d love to see if I can be of help! Feel free to click the Schedule Appointment button at the top of the page.
