Where should your extra cash go? Should you focus on saving money in a high-yield savings account (HYSA) or investing in stocks? These are important questions to ask when you’re trying to increase your financial stability and grow your net worth.
A high-yield savings account offers security and steady (though modest) growth — perfect for short-term goals and emergencies. Stocks, on the other hand, carry more risk but provide the potential for higher returns over time.
Striking the right balance between the two can make all the difference in reaching your financial goals. Here’s what you should know when deciding how much money to put in an HYSA vs. the stock market.
High-yield savings accounts work very much like traditional savings accounts, except they offer higher-than-average interest rates. In fact, the best high-yield savings accounts pay upwards of 4% APY. HYSAs are available from many banks and credit unions, though they’re often found online.
Depositing money into a high-yield savings account gives you a way to earn competitive interest on your savings, while safely setting the money aside for future expenses. And since there are few, if any, restrictions on how and when you can access your money, HYSAs are particularly great for emergency funds and sinking funds — that is, money you’ll need for a specific expense in the near future, such as paying for a wedding or buying a car.
Additionally, unlike stocks, there’s virtually no risk of losing money in an HYSA. The downside is that even the best HYSA rates aren’t high enough to grow your wealth significantly. So, if you’re saving for a big, long-term goal like retirement, putting all your money in an HYSA can hinder your progress.
Read more: Can a high-yield savings account replace your 401(k)?
When you invest in stocks, you’re buying a portion of ownership in a company, also known as a share. You can purchase stocks in several ways, including directly from the company (if available), through an online broker, or through certain types of retirement accounts.
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