How much money should you put in an HYSA vs. stocks?

Where should your extra cash go? Should you focus on saving money in a high-yield savings account (HYSA) or investing in stocks? These are important questions to ask when you’re trying to increase your financial stability and grow your net worth.

A high-yield savings account offers security and steady (though modest) growth — perfect for short-term goals and emergencies. Stocks, on the other hand, carry more risk but provide the potential for higher returns over time.

Striking the right balance between the two can make all the difference in reaching your financial goals. Here’s what you should know when deciding how much money to put in an HYSA vs. the stock market.

High-yield savings accounts work very much like traditional savings accounts, except they offer higher-than-average interest rates. In fact, the best high-yield savings accounts pay upwards of 4% APY. HYSAs are available from many banks and credit unions, though they’re often found online.

Depositing money into a high-yield savings account gives you a way to earn competitive interest on your savings, while safely setting the money aside for future expenses. And since there are few, if any, restrictions on how and when you can access your money, HYSAs are particularly great for emergency funds and sinking funds — that is, money you’ll need for a specific expense in the near future, such as paying for a wedding or buying a car.

Additionally, unlike stocks, there’s virtually no risk of losing money in an HYSA. The downside is that even the best HYSA rates aren’t high enough to grow your wealth significantly. So, if you’re saving for a big, long-term goal like retirement, putting all your money in an HYSA can hinder your progress.

Read more: Can a high-yield savings account replace your 401(k)​?

When you invest in stocks, you’re buying a portion of ownership in a company, also known as a share. You can purchase stocks in several ways, including directly from the company (if available), through an online broker, or through certain types of retirement accounts.

As a stock owner, you’ll make money if the value of the company you invest in grows or the stock pays dividends. And there’s potential for big returns. Historically, stocks yield higher returns than any other type of investment — around 10% a year, on average.

However, there’s no guarantee your stock will grow in value. In fact, there’s a possibility that the value of your stocks will drop, especially in the short term, depending on market conditions or the company’s performance. That’s why you shouldn’t keep any money you may need in the next five years in stock investments; investing over a longer horizon gives you enough time to recover from market dips.

For most people, both HYSAs and stocks can play a valuable role in their financial plans. As a general rule of thumb, aim to keep about 10% to 30% of your savings in an HYSA (for short-term needs and an emergency fund), and 70% to 90% of savings in stocks and other market investments (for long-term goals such as retirement, college, or general wealth building)

Of course, the exact breakdown of where you choose to keep your money depends on a few personal factors. Here’s what to consider before you decide where your money should go.

If you don’t have any liquid cash, meaning money you can access quickly and without any penalties, you should not, under any circumstances, purchase stocks. Full stop.

This includes emergency savings. If you don’t have any liquid cash in a HYSA or other savings account, purchasing stocks is a bad idea. You might be tempted to sell your stock at a lower value than what you purchased it for just because you need the money to cover an unexpected bill.

So, at the very least, you should have a fully funded emergency savings account and money set aside for other short-term goals (such as a down payment, vacation, or holiday expenses) in an HYSA. Any extra savings meant for longer-term goals can be invested in stocks.

Read more: How much money should I have in an emergency savings account?

Consider the length of time you can afford to part with your money. Pinpointing your time horizon is essential when deciding how and where to invest.

If there’s a chance you’ll need to access your savings within the next few years, you have a short time horizon, and you should not purchase stocks. The money is better off in a HYSA, or even in a CD or a Treasury bill, where you’ll have guaranteed returns, but you’ll still have access when you need it.

For stock investing, a time horizon of 5-10 years or more is usually recommended. During that time, you can expect to see your stock values fluctuate daily. However, when you hold for a decade or more, you’ll have the benefit of earning dividends and compound interest over the long term, and you can ride out the market fluctuations.

“Risk tolerance” refers to the degree of uncertainty or potential loss you’re comfortable with when investing your money. In other words, it’s how much volatility you can handle without panicking or making emotional decisions.

If you already have a steady income, solid emergency savings, and little debt, you should have a higher risk tolerance than someone who’s living paycheck to paycheck. In this case, you might consider investing in high-risk, high-reward assets like stocks in order to help increase your net worth.

Of course, it’s still important to maintain a diverse portfolio of investments that includes other assets, such as bonds, real estate, and cash equivalents.

If you have a low risk tolerance and prioritize safety over growth, you may prefer to keep your money in a low-risk option like a HYSA, where you’re guaranteed to maintain your full deposit amount, plus earn some interest. However, keep in mind that some risk is necessary for building wealth and achieving long-term goals.