SCHD vs High-Yield Savings Calculator

Is it safer to keep money in a high-yield savings account or invest in SCHD?

From a principal protection standpoint, high-yield savings accounts are safer as they are typically FDIC-insured up to $250,000 per depositor, per bank. The value of your deposit won't decrease, unlike SCHD which fluctuates with market conditions. However, "safety" can also refer to long-term purchasing power, where SCHD has historically provided better protection against inflation. The optimal choice depends on your time horizon and financial goals: high-yield savings for short-term needs and emergency funds, and SCHD for long-term growth and income.

How do changing interest rates affect both options?

Interest rate changes impact both options but in different ways:

High-Yield Savings: Direct and immediate impact. When the Federal Reserve raises rates, high-yield savings accounts typically follow with higher APYs, though often with a lag and not at the same magnitude. When rates fall, yields decrease accordingly.

SCHD: More complex relationship. Rising interest rates can initially pressure dividend stocks as they compete with bonds for income investors. However, many companies in SCHD can adapt to higher rates over time, potentially increasing dividends. Certain sectors within SCHD (like financials) may actually benefit from higher interest rates.

What happens to each option during economic recessions?

High-Yield Savings: Generally maintain principal value regardless of economic conditions. However, during recessions, the Federal Reserve often cuts interest rates significantly, which reduces the yield on savings accounts. The 2008 and 2020 recessions both saw savings rates fall dramatically, reducing income from these accounts.

SCHD: Typically experiences significant price volatility during recessions. For example, during the March 2020 COVID-related market crash, SCHD fell by approximately 28.35%. However, it recovered relatively quickly and the companies in the fund generally maintained dividend payments. SCHD's focus on quality companies with strong balance sheets provides some resilience during economic downturns compared to the broader market.

How does the tax treatment differ between these options?

High-Yield Savings: Interest earned is taxed as ordinary income at your federal and state income tax rates, which can be as high as 37% federal plus state taxes. There's no tax advantage or deferral option outside of specialized accounts.

SCHD: Offers two tax advantages: First, most dividends from SCHD qualify for the lower qualified dividend tax rates (0%, 15%, or 20% depending on your income bracket). Second, you control when to realize capital gains by choosing when to sell shares. Long-term capital gains (holdings over one year) are taxed at preferential rates. In taxable accounts, this tax efficiency gives SCHD a significant advantage.

Can I use a combination of both for my financial plan?

Yes, using both SCHD and high-yield savings accounts in your financial plan is not only possible but often recommended as part of a well-rounded strategy. Many financial professionals suggest a tiered approach:

• High-yield savings for emergency funds (3-6 months of expenses)
• High-yield savings for known expenses coming within 1-3 years
• SCHD and other investments for longer-term goals (5+ years)
• A potential hybrid approach for mid-term goals (3-5 years)

This balanced approach helps manage risk while still pursuing growth for longer-term financial goals. The specific allocation between the two depends on your risk tolerance, time horizon, and personal financial situation.