Savings

Why I Keep My Money Out of High Yield Savings Accounts

Photo of a man struggling with financial problems

Interest rates rise, causing stock prices to fall. So should I be looking to put my money in a high yield savings account right now?

Currently, there is an instant access savings account with an interest rate of 2.75% and a five-year fixed account offering 5% interest. These are very good rates – much higher than anything on offer a year ago.

Despite this, I am not looking to invest my money in high yield savings accounts at this time. The reason is simple – I think there are better investment opportunities for me elsewhere.

Shares

I think I can get a better return on my money investing in UK companies through the stock market. Even considering the risk of owning stocks, this seems like a much more attractive opportunity to me.

For example, I could buy a stake in British American Tobacco, whose share price is currently £32.89. The company currently pays out £2.17 of its profits to its shareholders each year.

That’s an annual return of about 6.6%. Sure, the company’s profits could drop and it could reduce or stop paying its dividend, but the yield offered right now is significantly higher than the interest rate on a five-year savings account.

Alternatively, I could buy shares in Lloyd’s banking group. Last year, the company paid about 2.13 pence in dividends to its shareholders.

With the company’s shares priced at 42p right now, that’s a yield of 5.7%. Rising interest rates could lead to difficulties with mortgages in the UK, but I think Lloyds seems well placed to deal with this.

It seems to me that owning shares in UK companies will probably give me a better return than 5%. Stocks also have another advantage over savings accounts.

With stocks, there is room for growth. Companies could earn and distribute more money in the future, which means that I will get an even better return.

This is not possible with a fixed rate savings account. For five years, the annual return is guaranteed not to exceed 5%.

As a result, I’m not attracted to savings accounts at the moment, even with high yield available. I prefer to invest in companies and get a return on my share of the profits.

Emergency room

All of this comes with a very important caveat, however. I’m only looking to invest through the stock market for money that I don’t anticipate needing in the near future.

It is difficult to predict what might happen to stock prices over a short period of time. So buying stocks is only for money that I am willing to leave for an extended period of time.

For my emergency fund, I would be very happy to have an instant access savings account with an interest rate of 2.75%. The same goes for the money I plan to use to finance purchases over the next two years.

But for a five-year investment, I’d rather put my money to work buying stocks in companies. During this period, I think I will easily outperform a fixed savings account.

The post office Why I Keep My Money Out of High Yield Savings Accounts appeared first on The Motley Fool United Kingdom.

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Stephen Wright has no position in any of the stocks mentioned. The Motley Fool UK recommended British American Tobacco and Lloyds Banking Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.

Motley Fool United Kingdom 2022