Savings

Saving money has always been a concept that I knew was important, but it wasn't until my 30s that I truly understood just how crucial it is for financial stability and long-term security. Growing up, I didn’t think much about retirement or what my financial future would look like. It wasn't until I faced my own financial challenges that I realized the importance of building a safety net for unexpected expenses, and how saving could be the first step toward achieving the life I want.

In my case, saving wasn’t just about putting money away for emergencies - it was about creating a foundation for my future. When I started looking into the realities of retirement savings, I was shocked to learn that many people in my generation aren’t saving enough. The Federal Reserve conducted a survey in 2022 showing the median retirement savings was far from the amount needed to live comfortably after retiring​. The sad truth is that, for many, saving alone won’t be enough to retire with financial security.

But even as I was coming to terms with the challenges ahead, I knew that saving - no matter how small - was still essential. It's a starting point. The habit of saving can provide the security I need to weather life's unexpected storms and offer the peace of mind that I won't be financially vulnerable in times of need.

And yet, savings alone, especially given the rising costs of living and stagnant wages, won’t get me to the finish line of financial independence. That’s why it’s become clear to me that savings is just the foundation; the next step is making my money work harder for me. This is why I’ve begun investing, as I believe that leveraging my savings to generate passive income will be the key to securing the financial future I want.

In the end, saving is the first step to financial security, but I’ve come to realize it’s not the end goal. It’s a tool - a tool that, when used strategically, can provide the stability I need to focus on growing my wealth and achieving the financial freedom I’ve always dreamed of.

Traditional Savings

Traditional savings accounts are a common and straightforward way for people to store their money safely while earning a small amount of interest. Typically offered by banks and credit unions, these accounts are low-risk and easily accessible, making them a popular choice for emergency funds and short-term savings.

Average Return Rates

The average return rate for traditional savings accounts in the U.S. is quite low, usually ranging from 0.01% to 0.10% as of 2024, below the inflation rate, meaning that while your savings grow a bit, they’re not likely to outpace inflation. However, some online banks and credit unions might offer slightly higher rates, typically in the range of 0.30% to 0.50% for traditional savings accounts .

Pros of Traditional Savings Accounts

  • Low Risk: Savings accounts are FDIC-insured (up to $250,000), meaning your money is protected by the federal government if the bank fails.

  • Liquidity: Unlike investment accounts or certificates of deposit (CDs), savings accounts allow you to access your money easily without penalties, which makes them ideal for emergency funds or short-term savings.

  • Simplicity: They’re easy to open and manage, requiring little more than a deposit and minimal interaction with the account once it’s set up.

  • No Fees: Many banks offer savings accounts with no monthly fees, though certain conditions may apply (e.g., minimum balance requirements).

Cons of Traditional Savings Accounts

  • Low Interest Rates: As mentioned, the interest rates are typically very low, which means your savings won't grow quickly. With inflation rates often higher than savings account returns, the purchasing power of your money can actually decrease over time.

  • Inflation Risk: The returns from a savings account rarely keep up with inflation, meaning that your money loses value in real terms, especially over the long term.

  • Opportunity Cost: Keeping too much money in a low-interest savings account may limit your ability to earn higher returns through other investments, such as stocks or bonds, which have greater growth potential.

While traditional savings accounts are safe and easy to use, they may not be the best option for long-term wealth building due to their low interest rates. For higher returns, many individuals look to alternative options, like high-yield savings accounts (HYSAs) or investments that carry more risk but offer greater potential growth .

Certificate of Deposit (CDs)

Certificates of Deposit (CDs) are a type of deposit account offered by banks and credit unions that offer a higher interest rate than traditional savings accounts in exchange for committing your money for a fixed period of time. This makes them a good option for those looking to earn a more stable return while still maintaining low risk.

Average Return Rates

As of 2024, the average return on a one-year CD in the U.S. is around 4% to 5%, depending on the institution and the term length. Longer-term CDs typically offer higher interest rates, with some institutions offering rates up to 5% or more for 5-year CDs. This is a significantly higher rate compared to traditional savings accounts, where the interest rate typically falls below 0.10%.

Pros of CDs

  • Higher Interest Rates: The main benefit of a CD is the higher interest rate compared to a traditional savings account. This allows your money to grow faster, especially for those who are able to lock away their savings for a longer period of time.

  • Low Risk: Like traditional savings accounts, CDs are also FDIC-insured (up to $250,000), meaning your money is protected if the bank fails.

  • Predictability: With a fixed interest rate and a set term length, you know exactly how much interest you will earn over the life of the CD. This can help with future financial planning.

  • No Fees: Most CDs don’t have monthly maintenance fees, though early withdrawals can incur a penalty.

Cons of CDs

  • Limited Access to Funds: The biggest downside of CDs is that your money is locked in for a set period, ranging from a few months to several years. If you need to access your funds before the term ends, you may face a penalty, typically forfeiting some or all of the interest earned.

  • Inflation Risk: While the return is higher than that of a traditional savings account, it’s still not immune to inflation. If inflation exceeds the interest rate, your money’s purchasing power may decrease over time.

  • Opportunity Cost: By locking your money into a CD, you may miss out on higher returns from other investment opportunities, especially in a rapidly changing market.

How It Compares

CDs are generally better than traditional savings accounts when it comes to earning interest, mainly because of the higher return rates. A CD offers guaranteed higher returns as long as you don’t need to access your money before the maturity date. However, traditional savings accounts offer liquidity, meaning you can withdraw your money at any time without penalties, which makes them more flexible if you need quick access to your funds.

In terms of returns, CDs significantly outperform traditional savings accounts, especially in the current interest rate environment where CDs are offering 4% to 5% returns, compared to the typical 0.01% to 0.10% return on savings accounts need the flexibility to access your funds quickly, a savings account might be more suitable, as it does not come with the withdrawal restrictions of a CD.

For those with short- to medium-term savings goals and who can afford to lock their money away for a period of time, CDs offer a safer and more lucrative alternative to traditional savings accounts, helping your money grow at a faster rate. However, always consider the trade-off between higher interest and access to funds before committing to a CD.

High-Yield Saving Account (HYSA)

High Yield Savings Accounts (HYSAs) are a popular option for savers looking to earn a higher return on their savings while still maintaining liquidity. Unlike traditional savings accounts, HYSAs offer much higher interest rates, making them an attractive choice for those looking to grow their money without taking on significant risk.

Average Return Rates

As of 2024, the average return on High Yield Savings Accounts ranges from 3% to 5% annually, with some of the top accounts offering even higher rates. This is significantly better than the 0.01% to 0.10% returns typically offered by traditional savings accounts, and it can even surpass the rates provided by many CDs for short-term savings goals. The rates for HYSAs can fluctuate depending on the economy, so it's important to shop around for the best rates.

Pros of HYSA

  • Higher Returns: The primary advantage of HYSAs is the much higher interest rate compared to traditional savings accounts. Even small amounts of savings can benefit from the increased interest over time.

  • Liquidity: Unlike Certificates of Deposit (CDs), HYSAs allow for easy access to your money. There are generally no penalties for withdrawing funds, which makes HYSAs a flexible option for emergency savings.

  • Low Risk: Like traditional savings accounts and CDs, HYSAs are insured by the FDIC (up to $250,000 per depositor, per institution), meaning your money is protected in the event of bank failure.

  • No Withdrawal Restrictions: Although some HYSAs may limit the number of transactions per month (typically six), they are much more flexible than CDs, which lock your funds for a set term.

Cons of HYSA

  • Lower Returns Than CDs: While HYSAs offer better returns than traditional savings accounts, they typically do not offer as high a rate as CDs, particularly for longer-term deposits. If you're willing to lock away your savings for a set period, a CD might offer a higher return.

  • Interest Rate Fluctuations: The rates on HYSAs are variable, meaning they can change at any time based on market conditions. This could result in lower returns during periods of economic downturn or if the bank lowers their rates.

  • Monthly Withdrawal Limits: Many HYSAs have a limit on the number of withdrawals you can make per month (typically six), though there is no penalty for not meeting this limit. This can be an inconvenience for those who need regular access to their funds.

How It Compares

Compared to Traditional Savings Accounts: HYSAs offer significantly higher interest rates than traditional savings accounts. While traditional savings accounts might give you 0.01% to 0.10% in return, a HYSA can offer 3% to 5%. HYSAs also provide more flexibility than CDs because there are no penalties for withdrawing money (as long as you stay within the allowed transaction limits), while CDs lock your money for a set period.

Compared to CDs: HYSAs offer greater liquidity than CDs because they don't have withdrawal penalties, but they tend to offer lower interest rates than longer-term CDs. For example, a 1-year CD might offer a fixed return of 4% to 5%, while a HYSA may offer a variable return of around 3% to 4%. However, a HYSA’s rate is more flexible, and if the interest rate increases, your return may grow, whereas the rate on a CD is fixed for the term.

Conclusion: High Yield Savings Accounts provide an excellent balance between earning a higher return than a traditional savings account while maintaining easy access to your funds. They're particularly useful for short-term savings goals and emergency funds. However, for those who can afford to lock away their savings for a longer term, CDs may offer a higher, fixed return. In contrast, if you value liquidity and flexibility but still want to earn a competitive rate, HYSAs can be an ideal choice.

Always consider your financial goals, the need for liquidity, and the trade-offs between higher interest rates and accessibility before deciding whether a HYSA or CD is better for your situation.

My Thoughts

It’s clear to me that a traditional savings account isn’t the best choice for growing wealth. Both HYSAs and CDs offer better rates, but each comes with its own set of restrictions. HYSAs generally offer lower interest rates but allow me to access my money whenever I need it, making them more flexible. On the other hand, CDs tend to offer higher interest rates, but the money is locked in for a fixed period, which means I can't access it without facing penalties.

As someone who feels anxious about money, I found the HYSA option to be a more comfortable choice. Even though its rates aren't the highest, it's still a better return than a traditional savings account, and the flexibility of being able to access my funds if needed gives me peace of mind.

If you're able to set aside money for an extended period, a CD might be a good option for you. However, if you're looking to maximize your returns over the long term and are comfortable with more risk, investing in mutual funds or index funds could be a better way to grow your wealth. Ultimately, this choice depends on your risk tolerance and when you anticipate needing access to your funds.

Published: Jan 2nd, 2025