High-yield savings accounts vs. investing

 High-yield savings accounts (HYSAs) are all the rage these days, with interest rates above 5%. They haven't always been this good! But I wanted to show some numbers about why an HYSA can't take the place of investing in an index fund that follows the market.

If you KNOW you'll need some money in a year or two then sure, you don't have time to risk it in the market. The stock market goes up and down. About 75% of the time, it goes up, but we have no way of knowing what's going to happen in the next year. For example, let's compare a fabulous HYSA with a 5.5% interest rate to the 2008 stock market:

It's sad. If you invested in 2008, the market would have crashed and your investments would be worth only $862. If you needed that money right at the end of 2008 and had to sell, you would only get $862 back even though you'd put away $1200 ($100 a month for 12 months) in cash.

That's why we say if you need the money in a year - don't invest it.

It's important to note though that if you DIDN'T need the money that bad and just left it right where it was, you'd still own your shares. This example uses the popular whole market index fund VTI - it went from $72.60 a share at the beginning of 2008 to only $44.14/share (ouch) - that's why we say it "crashed".

But TODAY? At the end of 2023 VTI was worth $226 a share! I bet we wish we could buy it at ANY of those 2008 prices, but we can't go back in time. 

So let's look at it another way. After investing $100 a month all through 2008, you own 19.53 shares of VTI. They were worth $862 so you felt like you lost money. But today? 19.53 shares are worth over $4000. I hope you left them in and didn't sell them!

Over the long term

Finally, let's look at what would have happened if you just kept investing $100 a month, until the end of 2023. Now you can really see what you'd miss out on by just parking money in a savings account.

Both these graphs show an investment of $100/mo for 16 years - or $19,200. Both made money. The savings account growth is significant at 5.5%. But the investment account is almost $20,000 MORE.

Savings is great. Whatever you can do with money that's NOT SPENDING IT is great. But a savings account is no substitute for investing regularly in the market for the long term.