Both saving and investing are good choices if you want to grow your funds and keep them separate from the money you use for everyday expenses. While both options help you earn money on top of your contributions through interest, they come with diverse return rates and risk levels.

So, when it comes to traditional and high-yield savings accounts vs. investing, which option is the best? In this article, we’ll reveal the answer and provide the main differences between saving and investing your funds.

Savings Account vs. Investing—What To Choose & When

While both saving and investing can help you accumulate funds, they differ in many aspects. 

Saving means keeping your money in low-risk, low-return accounts, such as:

• Traditional or online savings accounts
• Money market accounts
• Certificates of deposit (CDs)

The funds you hold in these accounts are more liquid than those kept in investment accounts—you can typically access them more easily, which makes savings accounts more suitable for short-term goals.

Meanwhile, investing funds refers to buying various investment vehicles like stocks, bonds, exchange-traded funds (ETFs), or real estate. Such investments typically involve higher risk, but they can also potentially bring higher rewards. You can access investments in several ways, including the following: 

• Retirement accounts
• Individual stock trading
• Mutual funds

Regardless of how risky your chosen investment is, tying your money down in an investment for a longer period allows more funds to accumulate, which makes investing more suitable for long-term goals. This is especially true for stock investments since the S&P 500 index has returned an average of 6.04% in 2024 so far. In contrast, the average savings account annual percentage yield (APY) is 0.45%.

Why Are Savings Accounts Not the Best Choice for Long-Term Investments?

Investing is riskier than saving since your earnings depend on how well your investments perform—if they lose value, you can lose some or all of your money.

Still, savings accounts offer significantly lower return rates than investment accounts. So, if you want to grow funds for long-term investments like a house or car, investing money can help you reach that goal faster.

If Investing Can Bring Higher Returns, Why Should You Put Money in a Savings Account at All?

While investing money helps you earn more in a shorter period, it still comes with a few drawbacks. For example:

• Investing typically isn’t as liquid as saving money, meaning your funds usually aren’t readily accessible
• Investments like stocks and real estate are highly volatile and can result in money losses rather than profit
• Investing requires you to either have specialized knowledge of what to invest in or hire a professional to make investing decisions for you

So, if you want to save funds for short-term goals like a vacation and don’t want to risk losing money, opening a savings account may be a better option. Although the return rates these accounts offer can be low, they guarantee you’ll earn interest on your contributions, and most of them are FDIC-insured.

High-Yield Savings Account vs. Investing—What’s the Difference?

Although savings accounts typically offer lower returns, some types of accounts offer higher rates. For example, a high-yield savings account offers an annual percentage yield that can be ten times higher than the average savings account rate. Still, while higher interest rates may make it seem like there’s no difference between investing and high-yield savings accounts, the two differ in terms of:

1. Potential gains
2. Risks
3. Liquidity

Potential Gains

While high-yield savings accounts offer higher return rates, they’re still not high enough to outpace the rapidly increasing inflation rates. This means these accounts may not be suitable for long-term investments. Meanwhile, the interest you can earn by investing is much higher, so if your investments perform well, you can earn significantly more money than you initially invested despite inflation.

Risks

High-yield savings accounts are risk-free—even if your bank fails, the FDIC or the NCUA will provide insurance up to $250,000 per account. Plus, although return rates can fluctuate over time, earning interest is guaranteed.

Investments, however, can be highly volatile in the short term. This means that your earnings and initial contribution may be at risk—if your investment loses value, you won’t be able to get any funds back.

Liquidity

When you hold money in a high-yield savings account, you can usually access it by transferring it to a checking account. Sometimes, you even get an ATM card you can use for withdrawals. Meanwhile, investments typically require you to leave your money untouched for a longer term. For example, if you invest money in a retirement account, you often can’t withdraw it before you reach a required age without incurring taxes and penalties.

How Does Investing in the Stock Market Differ From Putting Money in a Savings Account at a Bank?

When you decide to put money in a savings account, you typically:

1. Open an account of your choice
2. Deposit funds into the account
3. Earn interest on your contributions

Buying stocks implies purchasing a share in the ownership of a company, which makes you its partial owner. When the company’s value increases, so does the value of the stock, and you earn money. However, if its value decreases, you risk losing some or all of your investments.

The main difference between investing in stocks and putting money in a savings account is that the latter offers a guaranteed return on your investment. So, even if the return rates are low, you’ll definitely grow funds as time goes by. Meanwhile, stocks can be a great option for growing your money fast due to their high interest rates, but earning interest isn’t guaranteed.

In Which Situation Would a Savings Account Be the Best Investment?

Both investing and savings account have their pros and cons, but there are some situations when savings accounts are clearly the better choice. Opening a savings account is a better option than investing money if:

• You’re saving for short-term goals you’ll need money for in the next few years
• You want to build an emergency fund
• You’re looking for a way to keep your funds safe while earning interest

If the last two points apply to you, you don’t want just any savings account. Instead, you want a savings account with a focus on security to ensure you don’t lose your savings to scams. That’s where FortKnox comes in, a high-security savings account by Austin Capital Bank.