Are you saving and investing in a high-yield savings account, and is it worth it?

Key Points from 24/7 Wall St.

• It’s important to understand the difference between saving and investing money.
• A high-yield savings account is a great home for your emergency fund, but not your retirement nest egg while you’re building it. ^(Sponsor)
• Use a savings account to park your cash safely, but invest to build wealth.

When a friend mentioned the other day that her New Year’s resolution for 2025 was to boost her savings, I asked what her goal entailed. She said she wanted her savings account balance to reach $50,000 before Dec. 31 — a reasonable milestone given where she’s at right now.

I then asked her how she’s doing on retirement savings. Her answer? “Eh.”

I pushed further, and turns out she’s in her 40s with more money in her savings account than in any account she has earmarked for retirement. And that’s a problem in my book.

See, I’m a big fan of not only having a savings account, but a well-funded one for emergencies. But there’s a difference between saving money in the bank and investing money for the future. And it’s important to know when each one is appropriate.

Everyone needs a cushion

A savings account is the perfect place to park cash you have earmarked for unplanned bills or near-term goals. You wouldn’t want to invest a $10,000 emergency fund, because if your portfolio value drops to $8,000 the moment you need that $10,000 to buy a new roof or make a major car repair, guess what? You’re suddenly short.

That’s why my advice to everyone is to find a high-yield savings account and keep enough money in it to cover a minimum of three months of essential bills. On top of that, keep money for near-term purchases in a savings account so that if, for example, you need $40,000 on top of your three-month emergency fund to put down on a house, that cash should stay in your savings until you’ve become a homeowner.

But when we talk about money being used to meet long-term goals, like retire or put kids through college, a savings account is the wrong vehicle of choice. A better bet is to invest your money in stocks and other assets, whether by funding a 401(k), contributing to an IRA, or opening a taxable brokerage account (you’ll forgo some IRS benefits, but you’ll gain flexibility).

In fact, a big problem with using a savings account to meet long-term goals is that you’re likely to lag behind inflation. Right now, you might get 4% out of a high-yield savings account. But today’s rates aren’t the norm.

The Federal Reserve’s target annual inflation rate over time is 2%. And savings accounts have, on many past occasions, struggled to match that. And even so, you want your money to outpace inflation so you’re able to accumulate a nice-sized nest egg and set yourself up with plenty of buying power in retirement.

Is it worth having a savings account today?

A savings account is worth having today, last year, 10 years ago, and 20 years from now. No matter your age or financial situation, you should always have some money in a savings account so you’re covered for emergencies. But whether it’s worth putting extra money into a savings account today depends on your situation.

If you’re still building your emergency fund, then yes, absolutely — aim to boost your savings account balance. If you’re saving for a house you think you’ll buy in 2026, then yes – put more cash into savings. And if you’re looking at retiring later this year, or you’re already retired, then go ahead and set yourself up with extra cash — it’s a good hedge in case the market tumbles and tapping your investment portfolio becomes undesirable.

But if your goal is to grow wealth for a far-off milestone, then your best bet is to make sure you have enough money in your savings account to cover your emergency fund needs. Depending on your situation, that could mean having four months’ worth of expenses on hand, six months’ worth, or more. From there, look to invest your money so it grows nicely over time.

And if you’re not sure how, there’s nothing wrong with falling back on shares of an S&P 500 ETF, or signing up for your workplace 401(k) and dumping your money into a target date fund. Either option will likely yield better results over time than sticking to plain old cash.