So why am I writing about money in savings accounts on a career site? Because smart money management goes hand-in-hand with being able to retire when you want to. And having enough money also means you can be choosier about the jobs you do take … as well as not having to keep working into your eighties and even nineties … unless you want to!
But savings banks pay so little compared to other types of liquid (easily accessed funds) or semi-liquid investments. So what’s the reason so many people keep so much of their savings at low bank savings rates? Probably because it’s so easy and feels safer than other options. And they just don’t think about what that might mean in real dollars and cents for them down the road.
All hail the power of compounding!
While money in savings accounts may feel safe, you lose dollars each year your money sits at a low rate. But because banks can get away with it(although investors are starting to wise up to the alternatives), most banks see no need to raise their ridiculously low basic savings rates.
With the power of compounding, the interest you earn also grows by that interest rate. So a larger rate equals much larger growth over time. And a small rate leaves you way behind in money growth. Chase pays .01% on savings credited and compounded monthly as I type this — that’s only 1/10 of 1%!
These two charts below give you a very simple look at no interest over time (which is close to what many bank savings accounts pay) vs 5% compounded interest on the same savings. The difference is eye-opening!
SOURCE: Simple Chart of Retirement Money Growth Over Time
So although you think you’re playing it safe with your money in savings accounts, by not searching out higher — while also safe investments — you are actually losing money. And you’re stealing from your future ability to perhaps buy that house or dream vacation or retire with a sense of peace.
So why do people accept so little?
As mentioned, many people see low-earning bank savings accounts as safe investments, especially those that are FDIC insured — and that’s a majority of U.S. banks. After all, you certainly can sleep better knowing up to $250,000 of your money is protected if a bank fails.
Banks know that too. So they see no need to offer their customers more tempting savings account rates. Especially the brick & mortar long-established banks. Though people are beginning to seek out better rates for the bulk of their liquid funds. And the smart ones, IMHO, now keep only a little in regular savings and checking.
So where can you put your money instead?
It depends on how much risk you can tolerate. One of the least risky investments, money market funds, also may not pay much. Though in higher interest times as we’ve seen lately, their rates have been pretty attractive. And for sure they’re higher than most regular bank savings accounts.
So for anyone who thinks about playing it safe, this may be a good choice. And these investment funds are FDIC insured if the institution is. Banks also offer CDs, not always the highest paying either, but better than savings — though not as readily available if needed without an interest penalty.
And … from your brokerage account … you can look into brokered CDs. They pay more and some are FDIC insured. But investigate carefully so you understand the pros and cons. As with any CD, they are not as liquid as cash or Money Market accounts. So diversifying (not keeping all your investment eggs in one basket) is always a wise way to go when investing.
Summing it up
Most people want to protect their hard-earned money. So I get why someone would go for the lowest risk investment they can find, like a bank savings account. But if your savings don’t keep up with inflation, then that can be a much greater risk — not enough future money when needed.
Higher interest rates for the vast portion of your investments also helps you accumulate more money, which in turn allows that higher interest rate to compound each time. While really low rates (like when banks pay so little) may be not much better than a piggy bank or under the mattress.
I think it always pays to at least explore your options. And it more than pays in peace of mind (and not being as vulnerable to market twists and turns) to create a balanced investment portfolio that leaves you with readily-available funds as well as a mix of higher paying, good quality varied-risk options.
It’s your money. Make it work for you!
NOTE: For investments with maturity dates, you can “ladder” them, which means spreading out the maturity dates over time so not all mature at once. Again, helping you balance access to funds with earnings while still letting your money grow.
More posts to help
How Much Money Do You Need To Retire?
Retirement Reality: What Happened To The Dream?
How To Create a Cash Flow Spreadsheet
How To Create a Budget Plan Spreadsheet
Advantages of SEP IRA Plans for Freelancers
Credit 101: How To Make Credit Work For You
Basic Guide to Investing in Bonds
Why Diversified Investing Is So Important
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