Is $25,000 too much to keep in a high-yield savings account?

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If you’ve managed to put $25,000 in a savings account, congratulations! The average American has $8,000 in their savings account, which means you’re doing better than most. But it also raises some important questions: Where should you keep that money, and how can you use it for your life and financial goals?

A high-yield savings account (HSYA) is a great way to park your funds while you make decisions, but it may not be the best choice in the long run. Let’s look at why you might (and might not) want to keep that $25,000 in your HYSA.

When It Might Make Sense to Keep $25,000 in Your High-Yield Savings Account

High-yield savings accounts (HYSAs) are typically offered by online-only banks and offer higher interest rates than traditional banks. It usually takes a few days longer to transfer money from a HYSA, but it remains liquid. Your money is covered by FDIC insurance, so there is no risk even if the bank fails.

Keeping your $25,000 in a HYSA allows you to take advantage of compound interest that increases over time. For example, if you put that $25,000 in a HYSA with an average yield (APY) of 4.5%, you’ll have $26,148.50 after one year. After five years, you’ll have $31,294.90.

Keeping money in a HYSA means it is accessible. If you’re planning to make a large purchase or it’s your emergency fund, keeping the money in a HYSA ensures it remains accessible and protected from market fluctuations.

You may be able to earn more on another account

HYSA interest rates are currently high, but that is likely to change as the Fed has indicated that it may cut interest rates soon. This means that other options could generate a higher rate of return.

A certificate of deposit (CD) may be a better option if HYSA interest rates drop. CDs offer a guaranteed interest rate for a set period of time, usually a few months to a few years. There is one caveat, though: You’ll pay a penalty, usually a few months’ worth of interest, if you withdraw the money before the end of the term.

So, if you buy a 12-month CD and have to withdraw your money after 10 months, you won’t get the full interest rate and you’ll have to pay a penalty. This means CDs aren’t the right choice for your emergency fund or for cash you’ll need soon.

You could invest that money in the market, but you would be at the mercy of market fluctuations. If you invest that $25,000 in the stock market and earn an average return of 10%, you would have $27,617.83 after one year and $41,132.72 after five years. No HYSA offers that level of return, but it does come with risks.

Consider a balanced approach and distribute it across accounts

Another option is to spread your balance across multiple accounts. For example, you could keep $15,000 in your HYSA and put the remaining $10,000 into a CD. This will allow you to keep some of your funds liquid and benefit from higher interest rates on the CD.

You could also keep $10,000 in your HYSA and then create a CD ladder by buying three $5,000 CDs and varying their maturity dates. So, a 3-month CD, a 6-month CD, and a 12-month CD. This approach allows you to keep a large portion of your savings liquid and know that you will have a CD maturing soon if you need additional funds.

You could also keep $20,000 in your HYSA and put $5,000 in a brokerage account, where you might get a higher return. It all depends on your goals and when you might need to access the funds.

Final answer: It depends on what the money is used for.

Back to the original question: Is $25,000 too much for your HYSA? No, if that $25,000 is for a major purchase, like a down payment on a car or home, or if it’s your emergency fund, keeping $25,000 in your savings account is a good idea to protect it from market fluctuations.

However, if you want to maximize your income, consider a balanced approach: keep some of your money in your savings account and put the rest in a CD or investment account.

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