In Defense of Savings Accounts

In Defense of Savings Accounts

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.

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10 Comments... Read them below or add one of your own
  • Done by Forty September 26, 2016

    Good stuff as always, Matt. In general, I think people who are big savers are probably likely to have a little too much cash. Just my take, but the opportunity costs (at least for just short periods of time, as you noted) aren’t huge.

    The person who keeps too large of an emergency fund in cash, and does so for a whole working career though, he probably has astronomical opportunity costs.

    All in all, they have their purpose. We have some, and probably keep too much in them. 🙂

    • Matt Becker September 27, 2016

      That’s a great point. There’s absolutely a place for investing and you’re spot on that there’s a huge cost to avoiding it altogether. I don’t see much downside in leaning a little towards too much in savings accounts, but there’s absolutely a point at which that can be taken too far.

  • Kurt November 28, 2016

    I’m keen on savings accounts too Matt. Worse things can happen than earning 1%! Though I am looking forward to the day when the Fed finally nomalizes rates. That is, if anything like ‘normal’ still exists! 🙂

    • Matt Becker November 28, 2016

      Haha, I’m with you on all of that. The one thing that sometimes gets forgotten is that higher interest rates typically come with periods of higher inflation. So even if rates increase, it may not be as helpful as people might think when you factor in what that money can actually buy.

  • Xyz from Our Financial Path. November 28, 2016

    We found a 1.99% savings account at our credit union!!! Great for the emergency fund!

  • Miss Mazuma December 1, 2016

    Hi Matt – great points. I get some flack for my high cash savings but our credit union offers a 4% interest rate so I like to know I have guaranteed cash flow from it. I invest as well, but while saving for a down payment or life’s little disasters I like to have my money liquid and ready to go. 🙂

    • Matt Becker December 1, 2016

      Wow, 4% is pretty unbelievable. I’m curious, what are all the terms and conditions on the account?

    • Miss Mazuma December 1, 2016

      I am copying and pasting this because I wrote it on the RSF forum and I didn’t want to miss anything…

      It’s actually a checking account. You need a direct deposit and 15 debits a month to qualify for 4% otherwise the rate drops to .1%. You can have two accounts and each one will get 4% up to 25k. So 50k total gets 4% interest. If you go over, the extra money only gets .25%.

      Here is a little tip for those of you who need to make a minimum amount of swipes to qualify for something…

      I ordered a Square reader to be able to make swipes of my card on my iPad. I set my swipes to be credited to my checking account. I make 15 swipes a month (per account) for $1 each (that is the minimum charge Square allows). Square charges 2.5% per swipe rounded up to 3% per transaction. Each dollar I swipe gets charged .03. That is 45 cents every month per account = 90 cents subtracted from the $30 I charged my cards. The other 29.10 goes right back into the checking account I set up with Square. This way, I get my swipes for the month done without having to buy a bunch of unnecessary crap. 🙂

      • Matt Becker December 2, 2016

        That’s awesome! I love the creative solution and 4% interest on $50k is pretty amazing. Thanks for all the detail!

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