With high-yield savings APYs over 5%, it's a great time to put money in savings — but not too much

The high APYs on HYSAs won't last forever, so it's a good idea to start considering stocks, CDs, or Treasury bonds once you have a solid base.

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• High-yield savings accounts have seen huge APYs lately, but those rates may not last forever.
• The stock market fluctuates, but long term, it has returned over 12% annually in the last decade.
• Once your emergency fund is in place, stocks, CDs, and Treasury bonds are all worth considering.
• Earn 5.26% APY with a NexBank High Yield Savings Account.

High-yield savings accounts have garnered a lot of attention since the Federal Reserve began hiking interest rates in early 2022 — and with good reason. While the average national savings rate across financial institutions is under 0.5%, HYSAs at some major banks have offered APYs of 4% or higher. And at some banks, rates are well over 5%.

Understandably, savers have been turning to these vehicles to park their cash, and they are being rewarded for doing so.

But is it possible you're putting too much in one of these high-yield savings accounts? The APYs your bank promises are not guaranteed to stick around. Banks can change yields as they see fit, and when interest rates eventually come down, you can expect APYs to do the same.

The S&P 500's compounded annual gain between 1965 and 2022 is just around 10%, which means that if you're saving in lieu of investing, you could be missing out big time on gains. But when should you ease up on your savings accounts and consider investing your money instead?

Make sure you have an emergency fund

One component of your financial plan that it definitely makes sense to keep in a HYSA is your emergency fund. Advisors tend to recommend that you keep at least three to six months worth of expenses set aside in case of unforeseen circumstances, like losing your job or needing to pay an urgent medical bill.

While a quarter to a half a year of expenses is a good rule of thumb, Laura Mattia, a senior financial advisor at Atlas Fiduciary Financial, says to remember the amount you actually want to have set aside for emergencies can vary a lot depending on your specific financial situation. Factors like job stability, availability of other financial resources, and support systems like generous family members may all play a part in how much you need saved, she adds.

But once your emergency fund is in place already, you may benefit from funneling your upcoming earnings toward investment accounts instead.

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Consider investing for the long term

Money in a savings account should typically be for short-to mid-term goals, says Steve Oniya, president and chartered financial consultant at OM Investments. In addition to saving for emergencies, those goals can include expensive purchases or travel, for example, Oniya said.

Beyond that, you'll need to ask yourself some key questions: When will you need to have that money? Are you willing to take on additional risk, like the possibility of losing it?

"If your high-yield savings account is more than enough to cover your near-term goals and living expenses, then you're likely saving too much," says Tony Corsino, a financial planner with Zen Financial Planning. "You're also saving too much when the long-term real rates of return of your investments are being washed away by the rate of inflation."

Mattia says that while investments are inherently more risky and should be approached with a longer time horizon than savings, the compounding effects of higher returns on investments start to show substantial differences after several years.

For example, if you invested in the stock market in early 2022 but needed the money by the time December rolled around, you'd be out of luck: The S&P 500 fell around 18% that year. However, if your time horizon was a decade, you'd enjoy a nice return on your investment. The S&P 500 average return over the last 10 years has come in at around 12.39%.

That can make investing much more attractive than a savings account — even in a high-yield savings account — if you have a longer time horizon.

Alternatives to HYSAs

You don't have to decide between a savings account and investing in a retirement savings account — like a 401(k) or an IRA — or a taxable brokerage. There are other options that may be more appropriate for your situation, like CDs and Treasury bonds.

Those financial instruments can offer a locked yield, unlike a HYSA. But they may come with decreased liquidity, meaning there might be penalties for pulling out your money at any time. That's why it's important to have an emergency savings fund in place first.

"If one is confident they won't need the money for a specified duration, locking in a yield with a CD or Treasury bill can be advantageous," Mattia says. But think ahead. If you foresee a big expense in six months, then putting that money in a one-year CD or Treasury bond probably doesn't make sense.

"It's about finding the right balance between obtaining a competitive return and maintaining the necessary flexibility for your financial situation," Mattia says.

This article was originally published in October 2023.