Why You Shouldn’t Let High Interest Rates Seduce You
While increased interest rates are improving the returns on high-yield savings accounts, that may not be an effective place to park your money for the long term.
![A man smiles as he looks at cash he's fanned out in his hands.](https://cdn.mos.cms.futurecdn.net/xKnRnXz3UBNj4LB94fzGRB-415-80.jpg)
With today’s interest rates, money left in savings accounts is earning more than it has in years past.
Some banks are offering more than 5% annual percentage yield on savings accounts. A couple of years ago, those same high-yield savings accounts were offering just more than 1% APY. Therefore, seeing your interest credit on your account increase so drastically can be enticing.
For example, if you have $25,000 in a high-yield savings account at 1% APY, you would earn about $250 in interest over the course of a year. Now, if the APY were 5%, you would earn about $1,250 in interest a year. That’s a big difference. So, it can feel like your high-yield savings account is really working for you these days.
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A high-yield savings account can be a good way to build an emergency fund or save for something in the near future. But for long-term goals like retirement, you may want to consider investing your money and positioning it for protected growth.
Some consumers worry about a recession
Yet, many people are worried about the economy and nervous about investing. In fact, nearly half of all Americans (48%) said they are keeping more money than they should in cash because they’re worried about a recession, according to the 2024 Q1 Quarterly Market Perceptions Study* from Allianz Life Insurance Company of North America.
More than half of Americans (57%) said they are keeping more money in a high-yield savings account (HYSA) or money market funds because of interest rates. Millennials, in particular, said they are holding more money in these accounts. While 62% of Millennials said they are keeping more money in high-yield savings accounts or money market funds because of rising interest rates, 50% of Gen Xers and 54% of Boomers said the same.
The allure of high interest rates can make it feel like holding cash in an HYSA is a wise financial move.
Yes, you need to have cash for emergencies and unexpected expenses like car repairs, medical bills and other needs. You don’t want to take on debt in order to cover those bills. So, your emergency fund should be kept in cash or another liquid asset.
Beyond that, you need to keep your money for long-term savings working for you — invested in the market. While some investments can be volatile in the short term, investments typically increase in value in the end.
One big reason to stay invested in the market is to mitigate the effects of inflation on your assets. This is important, as we recently experienced a period of high inflation, and 68% of Americans still say prices are too high and they are struggling to stay afloat. A savings account will likely have a lower interest rate than inflation, meaning your purchasing power is decreasing over time.
Limit your risk exposure
You can take part in the market and invest without throwing all caution to the wind. Investing in the market typically provides greater returns than a savings account over the long term. There are investment options that are less volatile than the market as a whole.
Index funds and stocks that historically pay dividends are often strong places to invest over the long term. You could also buy exchange-traded funds (ETFs) that represent a basket of securities and are traded like stocks on stock exchanges, most with relatively low fees. You can select from different kinds of ETFs, depending on the benefits you’re looking for. If your top concern is limiting exposure to market risk, an ETF with a buffer or floor may be a good option to manage downside exposure.
At the same time, varying your holdings can help to diversify your taxable income. The interest earned in a high-yield savings account is taxed like ordinary income. In comparison, gains from selling stocks that you held for at least a year may qualify for the lower capital gains tax rate.
Instead of parking money in cash, keep investing toward long-term goals. This could include contributions to your employer-sponsored retirement plan, like a 401(k) or a Roth individual retirement account. An annuity designed for accumulating for retirement can offer tax-deferred growth, protects principal and has the potential to deliver indexed interest.
Consider an HSA or 529 plan
You may also want to consider adding funds to a health savings account (HSA) or to children’s education funds, like a 529 plan. These accounts are tax-advantaged and can help pay for medical and education expenses later on. This is all about the potential to build wealth for the long term.
While interest rates are high now, they may go back down. Moreover, we don’t know when or by how much. So, for long-term growth, that HYSA may not cut it. Keeping money in cash could cause you to lose out in the end. A financial professional can help determine what’s suitable for your situation. For your future financial security, it may be appropriate for you to continue to invest in the market — with the risks in mind.
* Allianz Life conducted an online survey, the 2024 Q1 Quarterly Market Perceptions Study, in February 2024 with a nationally representative sample of 1,005 respondents age 18+.
Allianz Life Insurance Company of North America (Allianz Life) has been keeping its promises since 1896 by helping Americans achieve their retirement income and protection goals with a variety of annuity and life insurance products.
Diversification does not ensure a profit or protect against a loss.
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Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.
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