Compare a high-yield savings account against an index fund over any horizon, with inflation built in — so you see real (purchasing-power-adjusted) ending wealth on both paths.
Under 3 years, HYSA — markets can drop 30%+ in a year and there's no time to recover. Over 10 years, index funds win by 50-100% in real terms — the equity premium of ~4 percentage points above cash compounds enormously. 3-10 years is the messy middle where a mixed approach makes sense. Calculator below shows your specific spread.
| Path | Total Contributed | Ending Nominal | Ending Real (today's $) | Real Annual Return |
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Takes about 1 minute.
Equity risk premium. Over the long run, stocks have returned about 4-5 percentage points more than cash (and about 3-4 above bonds). This premium compensates investors for accepting volatility. The calculator shows that premium compounded.
Real vs nominal. Nominal returns are what your statement shows. Real returns subtract inflation — they measure actual purchasing power. A 5% HYSA at 3% inflation is a 2% real return; a 7% index fund at 3% is 4% real. The gap in real terms is what matters for long-term wealth.
Volatility tolerance. An index fund can drop 30-40% in any 12-month period. Over 30 years it has never lost money in inflation-adjusted terms (US data 1926-present). The question isn't "will it recover" — it's "will you sell at the bottom". Most retail investors who've lost money in stocks did so by panicking out, not by being in.
Tax treatment. HYSA interest is taxed as ordinary income (US: marginal rate up to 37%; UK: above the £1,000 Personal Savings Allowance for basic-rate taxpayers; SA: above the R23,800/R34,500 annual interest exemption). Index funds in tax-advantaged accounts (IRA, 401k, Roth, ISA, TFSA, RA) compound tax-free. In taxable accounts, qualified dividends and long-term cap gains in the US are taxed at preferential rates (0/15/20%). The tax drag on HYSAs is larger than on index funds — adding to the real-return advantage of investing.
What this calculator doesn't model. Tax on HYSA interest (assumed not deducted). Bear-market drawdowns mid-horizon (assumes smooth annual return). Behavioural risk (panic selling during downturns). For more sophisticated drawdown modelling, use the Retirement Drawdown Calculator.
A 35-year-old contributes $500/month to either an HYSA or a broad US index fund for 30 years. Total contributed: $500 × 12 × 30 = $180,000. Expected HYSA rate: 4.5%. Expected index fund nominal return: 7%. Inflation: 2.5%.
HYSA path. $500/month × annuity factor at 4.5% over 30 years = $381,015 nominal. Adjusted for 30 years of 2.5% inflation (divide by 1.025^30 = 2.098): $181,608 in today's purchasing power. Real return: about 2%.
Index fund path. $500/month × annuity factor at 7% over 30 years = $612,099 nominal. Adjusted for inflation: $291,756 in today's purchasing power. Real return: about 4.5%.
Real wealth difference: $110,148. Same contributions, same dollars saved each month, but the equity premium turned a $180k commitment into either $181k of real purchasing power (HYSA, barely above contributions) or $292k (index fund, +62% above contributions). Over 30 years, the equity premium pays for itself many times over.
Now shorten the horizon to 3 years. HYSA: ~$19,300 nominal, ~$17,940 real. Index fund: ~$20,030 nominal, ~$18,617 real. Difference: $677. The equity premium barely compounds over 3 years AND the risk of a 30% drawdown in any given year is real. For short horizons, the answer flips.
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