I regularly hear from people who want to learn how to invest because their money is “just sitting in a savings account earning nothing”.
That’s often the right mindset. Investing is a great way to save for long-term goals and should absolutely be a part of your financial plan.
But savings accounts are just as valuable, and in some cases are actually a better option than investing.
If you take the focus off of returns and remind yourself that the real goal of saving money is to give you the financial resources you need to make life choices that make you happy, you’ll find that savings accounts are often a great way to do just that.
Here are five reasons why I love savings accounts and you should too.
1. You don’t have to earn nothing
If your savings accounts are at a major bank, you probably are earning next to nothing right now.
A quick search online shows current interest rates ranging from 0.01% to 0.05% at the bigger banks, depending on how much money you have in the account.
In other words, nothing.
But it doesn’t have to be that way. It’s easy to earn 1% or more on your savings, which may not make you rich but at least means your money is growing.
The key is to look at online banks and local credit unions, both of which typically offer much better interest rates than the big traditional banks. I use Ally Bank myself and I love them. You can find other online banks here and local credit unions here.
If you’re earning next to nothing on your savings now, it’s probably worth switching banks.
2. Certainty in an uncertain world
Certainty is a difficult thing to come by and anything that provides it is a valuable tool.
Higher returns come with greater risk that the money won’t be there when you need it, especially if you might need it soon. And sometimes that risk isn’t worth the potential reward.
Let’s say you’re saving ahead for expected but irregular expenses like car repairs or trips to the doctor. Don’t you want to be absolutely sure that money is there when you need it?
Or what if you’re saving for a down payment in 3 years? If buying a house at a specific point in time is important to you, are you willing to risk that there might be a market downturn just before that time comes?
Savings accounts do one thing really well: they guarantee that your money will be there when you want it. Sometimes that guarantee is well worth the lower return.
3. Savings accounts are easily accessible
The money in your savings account is easily accessible for whatever comes up.
If you want to go on a trip, the money is there. If an exciting opportunity comes along that requires cash, the money is there. If your furnace breaks and you need to fix it, the money is there.
You don’t have to worry about how to get it. You don’t have to wait until you’re a certain age, like you do with retirement accounts. You don’t have to figure out which mutual funds to sell. You don’t have to worry about taxes.
The most you’ll have to do is transfer it to your checking account.
When you want access to your money for whatever comes up, savings accounts provide simplicity and peace of mind.
4. Funding life’s big opportunities
My wife and I relied on the money in our savings accounts to help fund our family’s expenses while we build up our businesses. We couldn’t have done it without our savings.
I’ve had clients use the money in their savings accounts to switch to a single income, scale back to part-time, move to be closer to family, or simply help handle the new expenses of having a baby.
Having money in savings gives you freedom to make decisions that set you back financially in pursuit of a life you actually enjoy.
5. How much is that lower return really costing you?
Let’s say you’re contributing $200 per month for a goal you want to reach in 3 years. And let’s say that you can earn 1% in a savings account vs. an expected 5% if you invest the money instead.
At the end of those 3 years, you’d have:
- $7,306 in a savings account
- $7,751 in an investment account
That is, you’d earn $445 more in the investment account than in the savings account. That’s certainly not nothing, but it’s probably not life-changing either.
And remember that while the 1% is as certain as it gets, that 5% return is anything but. You could get a better return and you could get worse. You could even lose money.
And anyways, over shorter periods of time your savings rate matters much more than your rate of return. So even if you could potentially earn more elsewhere, the difference likely won’t be as big as you think.
When to invest instead
I love savings accounts for any money that I’ll need within the next few years (like a house down payment), or any money I want to know with absolute certainty will be there when I need it (like my emergency fund).
But savings accounts aren’t always the right answer. There are plenty of cases where investing your money makes a lot more sense, such as for:
- Any goal with a long timeline. The higher returns from investing make a big difference over long periods of time and the risk of losing money decreases with time as well.
- Any goal with a flexible timeline. If you don’t need the money at a specific point in time, and if you’re okay with the possibility of it taking longer to reach your goal, then the risk associated with reaching for higher returns may be worth it to you.
Learn to love savings accounts
I love my savings accounts for the certainty they provide, their ease of use, and the opportunities they’ve allowed me and my family to pursue.
If you remember that the whole goal of saving is to facilitate the lifestyle you want to pursue, and not to maximize your return on investment, my guess is that you’ll learn to love savings accounts too.