The Federal Reserve warns that investment options should be considered when saving money in savings accounts. S&P 500 and index funds allow you to take advantage of compound interest, as do high-yield savings accounts (HYSA). SoFi and CIT Bank, for example, directly help you continue to receive optimal FDIC support. Read on to learn about the different possibilities for protecting and growing your financial security.
“Having a full savings account may seem like a smart decision”
Having a full savings account may seem like a smart decision, but keeping more than $25,000 in cash in the bank could be costing you money. While building up a reserve is key to your financial security, leaving large amounts untouched in a low-yield account prevents that money from growing to its full potential.
How much should you save for emergencies?
Financial experts agree that the ideal is to have an emergency fund that covers between three and six months of essential expenses, enough for unforeseen events such as job loss or medical bills. Once that threshold is reached—about $25,000 in many cases—keeping more money than necessary in a traditional savings account is no longer advantageous.
While conventional savings accounts offer an average annual return of just 0.40% according to the Federal Reserve, the S&P 500 index has generated an average of 12% per year since 1980 (including reinvested dividends). Investing the surplus, whether in stocks or index funds, could multiply your long-term gains compared to leaving it idle in the bank.
How to make your money work harder for you
Even for your short-term savings, there are much more profitable alternatives than a traditional account. High-yield savings accounts (HYSA) currently offer returns of around 4% per year, ten times more than the national average.
That means instead of earning just $100 in interest per year on $25,000, you could earn around $1,000 while still having access to your money. Plus, HYSAs are still FDIC-insured for up to $250,000, just like traditional banks, so your money stays safe.
Recommended options
Among the most notable alternatives on the market are:
SoFi Checking and Savings
Offers up to 4.50% APY on savings and 0.50% on checking with direct deposit, no fees, no minimum balance, and the possibility of receiving your paycheck up to two days early. It also includes overdraft coverage of up to $50 at no cost.
CIT Platinum Savings
Offers 4.00% APY for balances of $5,000 or more, with no opening or maintenance fees, and only $100 to open the account.
Both options allow you to maintain liquidity while growing your money much faster than a traditional account.
High-yield savings account pros and cons
Pro: Interest rates are still high
You can easily find a high-yield savings account with a rate of 4.30% right now by briefly shopping around online. That’s more than $4 earned for every $100 deposited into the account, done with very little effort or maintenance on behalf of the saver. And while today’s high-yield savings rates aren’t hovering around the 5% they were a few years ago, they’re still competitive. These accounts offer savers an easy way to earn interest on their money, which is always important but particularly so now, ahead of predicted rate cuts to come.
Con: Interest rates may fall sooner than expected
There is a wide expectation that the Federal Reserve will maintain its federal funds rate at its July meeting. But there’s also a wide expectation that it will cut that rate when the central bank meets again in September (the CME Group’s FedWatch tool projects a cut then around a 65% likelihood). But high-yield savings account rates won’t fall neatly in line with any formal Fed action or lack thereof.
Banks and lending institutions don’t need to wait for the Fed to cut rates to take preemptive action by reducing the rates they pay to savers. And while CD account holders will be immune from this until their account matures, high-yield savings account holders won’t be. In other words, today’s rates may be high, but they could fall sooner than expected, perhaps as soon as August if Fed officials make public comments encouraging a rate cut later this year.
