The short answer: a savings account and the S&P 500 solve different problems

A savings account keeps money safe and available. The S&P 500 is a bet that 500 large US companies will grow in value over years. One protects what you have. The other tries to make it bigger, but you can lose money and you cannot touch it without selling at whatever price the market is offering that day.

If you need the money within the next two to three years, or if losing 20 percent of it would hurt, a savings account is the right tool. If you have money you will not need for at least five years and can stomach watching it drop in value sometimes, the S&P 500 has historically returned more over long periods. Most people benefit from having both: emergency money in savings, and longer-term money in the market.

Key Takeaways

  • A savings account guarantees your money stays the same or grows slightly; the S&P 500 can drop 30 to 40 percent in bad years and take years to recover.
  • Savings account money is available when ready; S&P 500 money takes three business days to sell and move to your bank, and you sell at whatever the price is that day.
  • The S&P 500 has returned roughly 10 percent per year on average over the past 90 years, but that includes years with losses and requires you to stay invested through downturns.
  • A savings account pays between 4 and 5 percent interest right now, depending on the bank, which keeps pace with inflation but does not beat it.
  • The right choice depends on when you need the money and whether you can afford to lose it; most households need both.

What happens to your money in each account

In a savings account, your money sits in a bank. The bank pays you interest—currently between 4 and 5 percent per year at online banks, lower at traditional banks. Your balance goes up by that amount each month. If you deposit $10,000 at 4.5 percent, you earn roughly $450 in the first year. The money never shrinks. The bank is insured by the FDIC up to $250,000, so even if the bank fails, you get your money back.

In the S&P 500, you own a tiny piece of 500 companies. When those companies do well, the value of your ownership goes up. When they struggle, it goes down. The S&P 500 rose about 24 percent in 2023 and fell about 18 percent in 2022. If you had $10,000 in the S&P 500 in 2022, it became $8,200. In 2023, that $8,200 became roughly $10,168. You only get that money back if you sell your shares, and you sell at whatever price the market is offering that moment—not a price you choose.

Over very long periods—30 years or more—the S&P 500 has returned more money than a savings account. But "very long periods" means you have to ignore the years when it drops, and you have to not need the money during those drops.

The real cost of waiting for market returns

The S&P 500 averages roughly 10 percent per year over the past 90 years. That sounds better than 4.5 percent in a savings account. But that average includes years like 2008, when the S&P 500 fell 37 percent, and 2020, when it fell 34 percent before recovering. If you needed that money in 2009 or early 2020, you would have sold at a loss.

Inflation—the rising cost of things—is the real reason people consider the S&P 500. Right now, inflation is running around 3 percent per year. A 4.5 percent savings account beats that by 1.5 percent. The S&P 500, over time, beats inflation by much more. But you pay for that with the risk of losing money in the short term.

The math works only if you can leave the money alone. If you have $50,000 in the S&P 500 and the market drops 30 percent, you have $35,000 on paper. If you need to sell then, you lock in that loss. If you can wait three years for the market to recover, you probably come out ahead. If you cannot wait, you should not have put it there.

When a savings account is the right choice

Use a savings account for money you will need within two to three years. This includes emergency funds (three to six months of expenses), money for a down payment on a house or car, or funds set aside for a known expense like a medical procedure or home repair.

Use a savings account if losing 20 percent of the money would force you to change your plans. If you are saving $15,000 for a wedding in two years and the market drops, you cannot just postpone the wedding. A savings account guarantees the money is there.

Use a savings account if you sleep better knowing your money is safe. This is not a small thing. If market drops make you panic and sell at the bottom, you lock in losses. A savings account removes that temptation.

When the S&P 500 makes sense

The S&P 500 works for money you will not touch for at least five years, ideally ten or more. This is typically retirement savings, money for a child's college fund, or wealth you are building beyond your emergency fund.

You need to be able to ignore the market. If you check your balance every week and feel sick when it drops, the S&P 500 is not for you. If you can check it once a year and remember that drops are temporary, you can probably handle it.

The S&P 500 also works better when you add money regularly. If you invest $500 per month for 20 years, you buy more shares when the price is low and fewer when it is high. This smooths out the impact of market swings. If you dump a lump sum in and then watch it, you are more exposed to bad timing.

How to think about using both

Most financial advisors suggest a ladder: emergency money in a savings account, money for near-term goals in a savings account, and money for retirement or long-term goals in the market. This is not because one is better than the other. It is because they serve different purposes.

A practical example: you have $30,000. Put $10,000 in a high-yield savings account as an emergency fund. Put $5,000 in a savings account for a car down payment in two years. Put the remaining $15,000 in an S&P 500 index fund for retirement, which is at least ten years away. Now your emergency money is safe, your near-term goal is protected, and your long-term money has room to grow.

You do not have to choose one or the other. The question is really: what is this money for, and when do I need it? Answer that, and the right account becomes obvious.

Frequently Asked Questions

Can I lose money in a savings account?

No. The FDIC insures savings accounts up to $250,000 per bank. Your balance will not shrink. The only way to lose purchasing power is if inflation rises faster than your interest rate, which means your money buys less stuff, not that you have fewer dollars.

What if the S&P 500 crashes right after I invest?

It happens. The S&P 500 fell 34 percent in 2020. If you had invested $10,000 on January 1, 2020, it was worth $6,600 by March. But by the end of 2020, it was worth $12,150. If you had needed the money in March, you would have lost money. If you could wait, you came out ahead. This is why time horizon matters.

Is a savings account a waste of money if inflation is 3 percent and I earn 4.5 percent?

No. You are earning 1.5 percent above inflation, which means your money is actually getting stronger. That is not exciting, but it is not wasted. It is the price of safety and availability. The S&P 500 offers more growth, but you give up both.

How do I actually buy the S&P 500?

You cannot buy "the S&P 500" directly. You buy an index fund or exchange-traded fund (ETF) that tracks it. Common ones are VOO, SPY, and IVV. You open a brokerage account at a company like Fidelity, Vanguard, or Charles Schwab, deposit money, and buy shares. It takes about five minutes and costs nothing.

Should I move my savings account money to the S&P 500 to earn more?

Only if you will not need it for at least five years. If any of that money is for emergencies or near-term goals, keep it in savings. Moving emergency money to the market is how people end up selling at the worst time because they suddenly need cash.