Myth Busted: High Interest Rates Mean You Should Stick to Cash Instead of Investing
Written by
Jamie Stone
Edited by
Angela Corry
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With high-yield savings accounts and CDs now offering the best returns in over 15 years, often around 4% to 5%, many Americans are asking: “Why risk investing when I can get this much just by saving?”
It’s a reasonable question. After all, when rates were near zero for years, there was little incentive to keep cash in the bank.
Now, those yields feel like a safe, welcome reward. But while cash plays an important role in a financial plan, the myth is assuming it can replace long-term investing. In reality, relying solely on cash could cost you more than you think.
High Yields Are Helpful, But Not a Long-Term Growth Strategy
Yes, it’s true: today’s interest rates make saving more rewarding than in years past. Many online banks are offering annual percentage yields (APYs) near 5% on high-yield savings accounts and CDs.
But here’s what’s often overlooked: even at 5%, cash barely keeps pace with inflation over time. According to the U.S. Bureau of Labor Statistics, inflation has averaged roughly 2% to 3% per year since the 1990s, and it’s been even higher in recent years. That means your “real return” after inflation could be minimal. What’s more, cash doesn’t benefit from the power of compound growth in the same way stocks do. While it offers stability, it lacks the upside potential required for building wealth over decades.
Investing: Still the Best Path for Long-Term Growth
Historical data supports the value of staying invested. According to Forbes, the average annual return of the U.S. stock market over the long term has hovered around 10%, even accounting for downturns. That kind of growth, when compounded over decades, dramatically outpaces the interest earned in savings products, even at today’s elevated rates.
Let’s say you invest $10,000 in a diversified stock market fund and earn a 10% annual return over 30 years. You’d end up with over $174,000. In a savings account earning 5%, you’d have just over $43,000. That’s a huge gap in potential wealth and it’s why sticking exclusively with cash can be risky for long-term financial goals like retirement.
What a Balanced Approach Looks Like
Rather than choosing between cash and investing, a smart strategy is to use both for different goals:
- Cash: Ideal for short-term needs, emergency funds, or large purchases within the next 1-2 years.
- Investments: Best for long-term goals like retirement, college savings, or building wealth over decades.
A common rule of thumb is to keep 3-6 months of living expenses in cash, then invest the rest according to your timeline and risk tolerance. Consider speaking with a certified financial planner (CFP) to create a portfolio that fits your needs and remember that markets fluctuate, but time in the market is more powerful than timing the market.
It’s understandable to feel drawn to the comfort of high-yield savings in today’s interest rate environment. But mistaking cash for a wealth-building strategy is a trap. Cash is stable, not scalable. For long-term financial success, investing remains essential.
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