When people talk about investing, they’re often referring to stocks, bonds, real estate, precious metals or foreign currency. Those investment vehicles can offer a nice long-term return on your money, but they come with disadvantages. They can be incredibly volatile. They can carry quite a bit of risk. Often, there’s a significant amount of money needed for even a minimum investment. Sometimes it can be tricky to get your money out of the investment. Those are all significant disadvantages that are overlooked when people get excited about the potential for huge returns.
On the other side of the spectrum is the humble savings account. It’s not glamorous. In fact, it’s pretty boring – so boring that many people don’t even qualify it as an investment, though like any other investment, it’s a method of putting aside money for the future in order to create or preserve wealth. And it is an investment option that takes care of virtually every problem mentioned above.
Many people overlook savings accounts because of the relatively low long-term returns that one can expect from a savings account compared to the anticipated returns of other long-term investments. Often, savings accounts return a rate below inflation. However, a number of other advantages of savings accounts make up for that relatively low return.
Let’s take a closer look.
It’s FDIC-insured. What this means is that for the first $250,000 you have in a savings account, you’re automatically insured by the Federal Deposit Insurance Corporation against the failure of your bank. If your bank were to go out of business, the money in your account would be safe. You would either be paid that money directly or, more likely, a new account would be opened for you at another bank with the same balance as before.
Simply put, you’re not going to lose money in your savings account if a business fails. The same cannot be said of many other investments.
It’s low-risk. Savings accounts, by their very nature, don’t lose money. In many investments, you’ll lose money over the course of individual days, weeks, months or even years. But with a savings account, your balance won’t go down. It will only go up. (That is, until you take money out, of course.)
This is a huge mark in a savings account’s favor during a downturn in the stock market, bond market or real estate market. In 2008, when the S&P 500 dropped nearly 40 percent of its value in a single year, savings accounts everywhere held all of their value and even increased in value.
The advantage of savings accounts here is that they’re safe from volatility. If it is imperative that you not lose value in your investment in the short term, then a savings account will accomplish that wonderfully. Investments in the stock market, real estate and other products often lose value over the course of a year – or even three-year or five-year periods. That won’t happen in a savings account.
If you can’t afford to lose some of your money, a savings account is a great place to put it.
That’s not true for many other investments. Even the more liquid ones can take several days to get money into your pocket (or, more accurately, into your checking account). Some investment products, such as real estate properties, can take months or years to sell off, so that you have your money in hand.
This is why many people use their savings accounts as an emergency fund. When an emergency comes, they can easily access those funds and immediately have the cash they need to deal with urgent life problems. That often doesn’t work with other investments.
It does earn a return (albeit a small one). While a savings account doesn’t earn a big return, it can earn a small one – as much as 2 percent, depending on the bank.
That’s not a big flashy number like you might earn in the stock market, but it’s a steady and reliable number. You’ll earn that return like clockwork, and it won’t ever dip on you (unless your bank notifies you that it’s adjusted rates). In fact, in recent months, savings account rates have been rising steadily. That’s far better than the alternative of just stashing cash in your mattress.
It doesn’t require a big initial investment. Many investments, such as real estate properties and mutual funds, require a significant amount of money as an initial investment. For example, the Vanguard Total Stock Market Index Fund requires a $3,000 initial investment. Most real estate investments are quite expensive, often requiring a mortgage in order for most people to be able to afford them.
You’re not going to get rich from a savings account, but you’re not going to lose your shirt, either. A savings account is a safe place to put your money when you can’t afford to lose any or think you’ll need it in an emergency. It’s also a good place to put some of your investments as a hedge against losses – you can’t lose everything if some of your money is in an ordinary savings account, after all. It is a great short-term option.
Don’t overlook the virtues of the ordinary savings account. It can and should be a part of your financial plans.