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A Simple Rule for Deciding Whether to Put Money Into Savings or the Stock Market

by Christy Bieber | Feb. 22, 2021

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

woman thinking about how to make money

Image source: Getty Images

When you have spare money, what should you do with it?

When you're setting money aside for the future, you'll need to make a decision about what to do with it. There are many different options, but it often makes sense to decide between these two choices: Put the money into a high-yield savings account, or invest it in the stock market.

You'll typically choose from these two options. As long as you make smart investment choices, the stock market can provide reasonable returns without unreasonable risks. On the other hand, high-yield savings accounts are virtually risk free and the returns are similar to other safe investments.

But if you plan to put the bulk of your saved funds into one of these two asset types, you'll still need to decide which one to choose. The good news is, you can follow a simple rule of thumb to make that decision.

Should you put money into savings or invest it in the market?

Most experts advise against investing money in the stock market if you'll need it within the next two to five years. There's a good reason for that. The market tends to offer a consistent 7% to 10% average annual return over time -- but that's average annual returns. In some years, you'll earn much more and in others much less.

A savings account will pay much less interest. However, it's consistent and you won't need to tie up your money -- as you might with a CD or bond. And there's almost zero risk. Especially if the account is FDIC insured.

Let's say you invest money you'll need within a year or two. You could put your cash into the market right before a crash, and recovery might then take longer than you have. The market has always rebounded, but it can take time. If you can't wait out the rebound, you risk having to sell at a loss. But if you give yourself enough time, you can feel pretty safe about taking the chance to invest.

Of course, two to five years is a pretty long time range. So you'll need to decide where on that scale you want to fall. For me, I've chosen a three-year period. That's based on the fact that when the market has historically fallen into a bear market (fallen at least 20% from its high) the average length of recovery is two years. I prefer to err on the side of caution and allow myself a little extra time above this average.

How much risk do you want to take on?

You may decide to choose a different time period. A lot depends on how risk tolerant you are. It makes sense to consider the consequences of selling at a loss. The more damaging a loss would be, the more cautious you should be if you'll need the cash soon.

Of course, there's no perfect rule. The important thing to remember is, the shorter your investment timeline, the greater the risk you'll have to sell at a bad time. But if you definitely won't need the money for at least five years, investing is almost always going to be your best bet. Otherwise, the potential returns you earn in savings may not be enough to keep pace with inflation -- much less to help your money grow at a reasonable rate.

These savings accounts are FDIC insured and can earn you 12x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2021.

Two top online savings account picks

Rates as of Feb. 15, 2021 Ratings Methodology
Logo for CIT Bank Savings Builder
Logo for American Express® High Yield Savings Account
CIT Bank Savings Builder American Express® High Yield Savings Account
Member, FDIC Member, FDIC
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Open Account

On CIT's Secure Website.

Open Account

On American Express' Secure Website.

Read Review Read Review

APY: Up to 0.40%

APY: 0.50%

Best For: No monthly maintenance fee

Best For: High APY

Min. to earn APY: $25k or $100 monthly deposit for highest tier

Min. to earn APY: $0

About the Author

Christy Bieber
Christy Bieber icon-button-linkedin-2x

Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

The Motley Fool has a Disclosure Policy. The Author and/or The Motley Fool may have an interest in companies mentioned.

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

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