After years of low rates, high-yield savings accounts are having a moment.
This week, Apple Inc. introduced a new product with Goldman Sachs Group Inc. that will allow Apple Card holders to earn a 4.15% annual yield, with no fees or minimum deposit requirements. At the same time, Goldman’s popular Marcus account — the posterchild for high-yield savings products — upped its rate to a record of 3.9%.
It’s all part of the growing allure of cash investments, which are offering solid returns after years of near-zero rates, and provide investors with a degree of safety as recession fears continue to percolate. With yields on savings products that high, the thinking goes, why risk losing money in the stock market?
We asked financial experts what you should consider when weighing a high-yield savings account versus investing in the market.
It’s easy to get lured in by the high rates on savings products, but even the 4.15% yield from Apple is still less than inflation, which rose 5% in March from a year earlier.
Jarrod Sandra, owner of Chisholm Wealth Management in Texas, recommends thinking about your purchasing power. Even though your total savings account balance will continue to increase, the rate of growth isn’t currently keeping up with the higher prices of everyday goods.
Investing in the stock market is still one of the best ways to beat long-term inflation, according to Karen Ogden, partner at Envest Asset Management in Connecticut.
“The key is to know your time horizon and know your ability to stomach the risk,” she said.
Worries about near-term stock volatility are far from unwarranted: Hedge funds have been loading up on bets that the market will fall, and cash is flowing out of mutual funds amid recession fears and concerns about a decline in corporate earnings.
But for those who won’t need the money within the next five or more years, a diversified portfolio of stocks is still the best game in town, said Mike Hunsberger, owner of Next Mission Financial Planning.
Some investors in high-yield savings accounts may not realize that any interest earned is taxable in the year it’s accrued — even if you don’t take the money out.
“Contrast that with US government bonds, where you might have to tie up your money a bit longer, but you can still earn a relatively higher rate, defer taxes until you cash out and escape state taxes completely,” said Elliot Pepper, financial planner and director of tax at Northbrook Financial.
Of course, you’ll have to pay taxes on most investments eventually, but other options — including stocks and bonds — won’t incur taxes until you sell them.
What’s the right amount of cash to put in a high-yield savings account? Jeremy Keil, a financial adviser at Keil Financial Partners in Wisconsin, recommends three to six months worth of living expenses, as an emergency fund. Any more than that can go toward investing for the long term.
As the collapse of Silicon Valley Bank last month highlighted, putting your money in institutions insured up to the $250,000 Federal Deposit Insurance Corp. limit is crucial.
If you have more than that in your high-yield savings accounts, make sure to spread it out, said Noah Damsky, principal at Marina Wealth Advisors in California.
“If you reach the FDIC limit, a convenient option is to invest in Treasury bonds at the same institution rather than finding a new institution to stay under FDIC limits,” he said.
There are also services that will do this for you, taking cash above the FDIC limit in one bank and electronically parceling it out to other FDIC-insured institutions.
In terms of the new Apple product in particular, Pepper at Northbrook Financial warns of the risks that come with having so much of your personal and financial information with one company.
“No one enjoys a lost or stolen iPhone, and turning your phone into your de facto bank could create more headaches if someone were to lose their phone, have it stolen or have their Apple ID hacked,” he said.
You also have to get an Apple Card to take advantage of the new savings account. If doing so would tempt you to spend more money than your budget allows, it may be best to avoid it altogether.