The stock market may feel like being on a roller coaster right now, but it can be a good time to make some extra money without lifting a fingeror taking on too much risk.
Thanks to the Federal Reserve opting to continue rate hikes, the average interest on savings accounts and money market accounts, as well as CD rates, are generating big returns. Betterment, for example, hiked interest on its cash reserve account to 4.2% APY this week. Its far from the only game in town; Ally Bank offers 4% on its money market accounts, while Citizens offers 4.25% APY on its savings account.
With interest rates so high, there is a lot of money flowing to high-yield accountsespecially as market benchmarks like the S&P 500 have only delivered about 3.5% returns year to date. More than $460 billion has been flowing into money market funds, for example, since last March when the Fed began raising rates.
The challenge for stocks right now is that due to extended market volatility, cash yields are competitive, says Dale Shafer, CFP and founder of Arizona-based Life Moves Wealth Management. In other words, you might earn more on your savings account right now than your investments.
That begs the questionshould you change up your investing and savings game plan? The short answer from financial professionals: It depends.
Move your cash to a new high-yield home
If youve got an emergency savings stash sitting in a low-interest account, its practically a no-brainer to find a new home for that cash to earn a better rate. Especially when you consider that inflation is up 6% year-over-year.
Taking advantage of higher-yielding, insured savings accounts is a great way to maximize the power of compounding for ALL of your funds, not just stocks and bonds, says Mike Silane, a chartered financial analyst (CFA) and founder of California-based 21 West Wealth Management. This is especially important for emergency funds set aside for potentially important causes such as job loss or a large unexpected financial expense.
Just make sure that youre looking at all the terms and conditions of the account and rates. Some accounts have minimum deposit requirements to earn the maximum APY, for example.
Consider the best ways to rejigger your contributions
A lot of investors set up automatic withdrawals from their paycheck to their 401(k), or from their checking account to savings, brokerage, or Roth IRA accounts. Its a helpful strategy, but it can mean that it needs adjusting from time to time, like when you get a raise.
Now may also be a good time to consider where youre allocating your extra cash. But before you move your money around, first take a holistic approach and look at not only where and how youre investingbut what the goals are for that money long-term, financial planners recommend.
Consider: Do you have enough saved in your emergency fund? Are you on track to reach your short-term savings goals? Whats your outlook on your retirement savings?
The first thing I do is determine whether theyre already saving enough in the right places, says Crystal Rau, a certified financial planner (CFP) and founder of Texas-based Beyond Balanced Financial Planning. If theyre short on retirement savings, then no way would I tell them to reduce their savings in investments for a high-yield savings account. The old saying goes, buy low and sell high, so why miss out on getting into the market now when everything is on sale?
If you are on track to reach your goals, then it depends, Rau says. High-yield savings provides a great risk-free way to allow your cash to grow right now. If thats attractive, then Rau would recommend Americans drive more to a high-yield savings than other post-tax investmentsbut, again, only if their other goals are taken care of first.
If everything else in their financial profile is where it needs to be and the cash is truly idle, it makes sense to move it to a higher yielding account type, including money market, short-term CDs, and short-term Treasuries, Shafer adds.
Remember theres an opportunity cost to high-yield savings
While rates approaching 5% on high-yield savings accounts are a welcome increase, the vast majority of financial professionals Fortune spoke with did not recommend investors completely stop contributing to their various investing accounts in favor of high-yield savings.
Investors need to remember that the amount allocated to the high yield savings accounts also comes with an opportunity cost, says Jiayi (Kristy) Xu, a CFP and founder of Global Wealth Harbor.
The past 50 years of market data show that the average one-year S&P 500 index return after the above-average peak inflation is 17% and the average three-year S&P 500 index accumulative return after the above-average peak inflation is 46%. For long-term investors who consider growth to be their investment goal, allocating funds away from the equity market to put into high-yield savings accounts means they might lose the opportunities to take advantage of the equity market, Xu says.
Savings accounts are not a replacement for traditional long-term investments such as the stock market, adds Ben Wacek, CFP and founder of Minnesota-based Guide Financial Planning.
Though there is much uncertainty in the stock market and its very difficult, if not impossible, to know where it will go over the short-term, stock market investors have been rewarded by sticking with an allocation to stocks over the long-term, he says, noting that the U.S. stock market has provided a return of about 10% per year over the last century. So if an investor had $10,000 in a savings account yielding a 5% APY for 30 years, theyd have about $43,000. But those investing and getting a 10% average annual return would have about $174,000 after 30 years, Wacek calculates.
Dont sell to stash cash
Its one thing for investors to look around for the best rate on their existing cash, but its another to sell off investments. Financial planners dont advise taking that route for most investorsespecially younger Americans with long time horizons.
Why? Stocks and bonds are still well off their all-time highsand typically investors generally dont want to sell low, says Bryan Minogue, CFP and founder of Wisconsin-based Kardinal Financial.
For long-term investors, you should still expect a higher return from stocks and bonds compared to cash, Minogue says. But you dont want to make a habit of selling your investments in the midst of bear markets if you can avoid it.
