Could $1,000 Be Better in a Savings Account than the Stock Market?

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Decide based on your money goals and timeline. 

Do you have a little extra cash lying around these days? If you’ve got, say, $1,000 extra hanging out in your checking account, you should know that it pays to move it out of there and into an account where it will grow.

Ideally, your checking account is the place to keep cash you need in the near term, such as for paying your bills. If you keep money for the future there, it will lose value thanks to our old friend inflation. When it comes to earning more money on your money, you have options. What if you invested it?

You could open a brokerage account and buy ETFs (exchange-traded funds) or shares of individual stocks, for example. Or you could opt for a tax-advantaged retirement account, such as an IRA. This way, you could reduce your taxable income by $1,000 for the year you fund the account (you would have to pay taxes on your withdrawals in retirement, however). If you’d rather pay taxes upfront on that $1,000, go with a Roth IRA account instead. These aren’t your only choices for that $1,000, however. You could put it into a bank account that earns interest.

Bank account options

Your options for your $1,000 include:

Certificates of deposit (CDs)Money market accountsSavings accounts

There are different rules for different accounts (for example, if you decide to open a CD, you won’t be able to withdraw your money without penalty for a certain period of time that you choose).

The easiest interest-earning account to manage is a savings account. With one of these, you’ll earn interest (and the best high-yield savings accounts are earning upwards of 3% APY right now), and can withdraw your money pretty much at will, without risking the penalty of closing a CD account before the term is up.

Consider your goals and your timeline

The best way to decide where to put that $1,000 is to consider what you’re hoping to do with the money. Is it going to form the start of retirement savings for you (and therefore have decades to grow)? Is it the beginning of a down payment for a home? Or is it going to become your new emergency fund, waiting in the wings for when you have a surprise bill you can’t pay for with your regular earnings?

If you’re intending to grow your $1,000 into a comfortable retirement, you’ll earn much more return on the investment over the next few decades than you would if you opted for a savings account. After all, the S&P 500 gained value in 40 years out of the last 50. Its average annualized return was 9.4%. However, the market can fluctuate wildly over the short term, which is why it’s best to invest money over the long term (such as for retirement).

If your $1,000 is for a home purchase or an emergency fund (or some other shorter-term need), it’s a better idea to opt for that high-yield savings account. Why? For starters, your money will be protected. Choose a bank that is FDIC-insured, and in the event of bank failure, your money (up to $250,000 per eligible account) will be returned to you. This is not the case for money in a brokerage account. You’ll also enjoy earning interest on your $1,000, and it won’t be dependent on the performance of the larger stock market. If you open a savings account earning 3% APY, you’ll make $30.42 on your $1,000 in the first year.

You’re not going to find a high-yield savings account offering you 9.4% back, of course — but remember you can only reasonably hope to earn that much in the market over a period of many years. In the short term, money in a brokerage account could lose value, so it’s not a good idea to put money into one if you know you’ll need it soon. Opt for a good high-yield savings account instead.

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