With Bank Savings Rates at a Decade High, Should You Be Saving More and Investing Less?

Interest rates on savings accounts have increased over the past few months to levels not seen in decades. As savings rates continue to rise, many investors contemplate allocating more money into risk-free savings accounts instead of dicier assets, such as stocks.

How do today’s savings rates compare with stock market returns? Here’s what you need to know and should do as a savvy investor.

So What Should Investors Do?

While higher savings rates may make it more tempting for investors to allocate more money into savings accounts, deciding whether to save or invest ultimately depends on an individual’s financial goals, risk tolerance, and time horizon. It’s important to consider both the potential returns and the risks associated with each investment option.

As the Fed continues to fight inflation, interest rates may continue to rise. This could make savings accounts more attractive to investors looking for a risk-free return on their money. Many investors may move money from their brokerage accounts to high-yield savings accounts.

“With current inflation around 5-6%, I would only recommend shifting assets towards bank accounts if savings rates move about 7%,” says John Frank from Financial Freedom Countdown.

One important factor to consider is taxes. Investments in long-term index funds or exchange-traded funds (ETFs) are typically taxed at more favorable long-term capital gains rates.

Additional Considerations?

In contrast, taxes on the interest income from savings accounts is less favorable than ordinary interest rates. This means long-term investors holding stocks or index funds for more than one year may benefit from paying lower tax rates on their investment gains.

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