The High Yield Savings Trap

We often advise clients to utilize a high yield savings account as part of their financial plan, but placing too much in these accounts can create a drag on performance.

I remember being excited when I opened my first savings account. I loved the idea of moving money into an account that would pay me to keep my money there. Plus, “savings account” made it sound like I was doing something good.

Then I looked at a monthly statement. I don’t remember the exact rate, but I remember thinking the decimal had been put in the wrong place because zero point zero whatever sure didn’t feel like I was doing something good.

Of course, some banks have offered better rates and CDs are an option, but with the rise of digital banking we have easy access to high yield savings accounts.

We like and often recommend high yield savings accounts because it allows people to earn a safe return on their money while maintaining liquidity.

But… having too much money in a high yield savings account can turn a safety parachute into an anchor for your long-term financial success.

Yields on high yield savings accounts are often similar to the 3-month US Treasury yield. Occasionally that yield can be quite attractive, but over the long run, it has generally been comparable to inflation, especially over the past 20 years.

Seeing interest accrue in a savings account can look meaningful, especially on larger balances and when interest rates are higher, but you likely aren’t earning much of a real return and are mostly preserving your purchasing power.

Sometimes preserving purchasing power is enough. Here are some scenarios where we think a high yield savings account is appropriate:

Larger or unusual expenses that you’ll need money for in less than 12-24 months
- Examples: tax liability, car purchase, down payment, home improvement project
An emergency or “rainy day” fund
Cash flow management

For savings beyond these needs, there’s usually a more attractive option and we can look to history for a guide. We don’t know if the future will resemble the past, but since 1927 the annualized yield on the 3-month Treasury has been about 3.3%, slightly lower than today. From 1927 through the end of 2025, $100 would have grown to $2578, or nearly 26x the original investment. That sounds pretty good until we consider that $100 invested in the S&P 500 over the same period grew to more than $1.15 million, or 11,500x the original investment.

Historically, stocks have drastically outperformed short-term bonds, and if history is a guide, we believe that owning at least some stocks is appropriate for almost all investors.[1]

What’s a good balance to keep in a high yield savings account? Excluding reserves for known expenses like the examples above, the traditional guideline is three to six months of living expenses, but the right amount depends on your personal circumstances. Key factors include the number of income sources in your household, the reliability of those income streams, and the potential impact of losing one of those sources of income. Households with multiple, reliable incomes may be comfortable with a smaller cushion compared to a household with more concentrated or volatile income.

Many of our clients utilize a brokerage account alongside or in place of a high yield savings account. Brokerage accounts do come with different risks than a high yield savings account, including taking slightly longer to access your money and market risks, including the risk of loss, but these greater risks come with higher potential returns as well.

Typically, people worry about taking too much risk, but there’s also a risk in not taking enough risk, especially for investors with longer investment horizons.

If you have any questions about this blog, or other questions about your finances, please contact Blue River Capital Management at 503.334.0963 or at info@brcm.co.

This information is intended to be educational and is not tailored to the investment needs of any specific investor. Past performance is not indicative of future results. Investing involves risk, including risk of loss. You cannot invest directly in an index. Blue River Capital Management does not offer tax or legal advice. Results are not guaranteed. Always consult with a qualified tax professional about your situation.

[1] The appropriateness of stocks for an investor depends on a variety of factors including liquidity needs and the willingness and ability to bear the inherent risks.

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