It’s not about how much money you make, it’s about how much money you save. We have all heard this before, right? But is saving money such a good thing? There are millions of people who swear by their savings accounts. People love their bank accounts because they are safe. But, are savings accounts safe for you and your future? I want to take a look at the uses of a savings account and the negatives and positives.
High Yield Savings Account. First, we want to ensure that we are using a high yield savings account. These are usually online banks. The reason why we want to use high yield savings account for our main savings account is because the interest it pays you is a lot higher than a standard savings account. Currently, the Federal Reserve Bank is keeping rates low- in turn, the interest rates are low. However, they are still 8 times higher than a standards bank account. I personally use Discover Bank. They also have a cashback debit card (Sweet!).
Good Uses. Build an emergency fund. An emergency fund is your backup in case life happens. They say to keep 6 months of expenses in your emergency account. This doesn’t mean 6 months of living expenses, just what you absolutely need to survive.
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Kris and I currently have about $5,000 in savings. We are slowly adding more. This is how we use our savings account. If an emergency comes up, we use our credit card to pay for it. Then we come up with a plan using our cash flow to pay it off. If more things keep coming up, then we use our savings to pay off the debt.
Why do we do it like this? Because we hate credit card debt. When we have credit card debt we do everything in our power to pay it off. When you use your savings right off the bat, there isn’t really a rush to pay back into it. Saving is boring. So we use credit cards in order to rush the money we need to pay off. You can do as you choose.
Negatives of savings too much. There are negatives to saving too much. Building an emergency fund is a must. I don’t think that you need to build a $40,000-$50,000 emergency fund before you start investing, but that is just me. But there are 3 negatives to savings too much money and not investing in something. Let’s review the 3 negatives and then discuss some alternatives to investing in the stock market. The 3 negatives to saving too much in a savings account are inflation, the compounding effect, and opportunity costs.
Inflation. Inflation usually travels at the speed of 3% percent a year. This means that each year your money is becoming less valuable. Keeping money in a savings account is guaranteed to reduce your purchasing power.
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If I put $40,000 into a high-yield savings account at 1% interest, my compound interest calculator says that it would grow to $48,807 in 20 years. Over the same timeframe, with inflation at 3%, you would need $72,244 just to have the same original purchasing power.
Your savings account is a safety net for emergencies. You will need to decide how much you need to keep saved- depending on your lifestyle. But keeping all your money in savings is actually losing purchasing power.
The compounding effect. This is the effect of growing your money to the point where your money grows more money on top of itself. The compounding effect is the best part of investing in the stock market. With time, we can all become millionaires using the compound effect. You will be getting the compounding effect, to a much lesser extent, in your high yield savings account.
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Let’s look at our same example of $40,000 over 20 years. Let’s split the amount in half. $20,000 into the stock market at 8% and the other $20,000 in our high yield saving account at 1%. This would give us $117,622.
Let’s do the same with $30,000 in the stock market and $10,000 in savings. The total would $152,829. This handily beats our inflation amount of $72,244. There is another positive to having some of your money in the stock market- opportunity costs.
Opportunity costs. This could be the biggest negative of hiding your money in a high yield saving account. The stock market is extremely volatile, which is why most people do not want anything to do with it. But this can be one of its biggest advantages when using the correct strategy.
My strategy is to buy dividend-paying stocks. I usually dollar-cost-average into my favorite stocks, like Target. As you are investing, sometimes your favorite stocks go on sale (drop in price). As you are doing your standard investing, you are taking advantage of these dips in price.
These “buying days” are full of opportunity. We do not want to wait on the sidelines, looking for buying opportunities. They may never come. However, we can continue you go with our investment strategy and when a price drop happens, we need to “deploy capital” during this event.
This played out during the 2020 pandemic. Stocks were going for 50% of their full price because people wanted to cash out. This brings us to the major positive of a savings account.
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Positive of a savings account. This is your hedge to investing. “A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset.” This is your backup plan. As others were running to the stock market to pull out money, those with a savings account were safe and secure. Keep enough on hand to allow you to sleep during the bad times.
Alternatives to the stock market. If you have $40,000 in savings, you don’t have to put any of that money into the stock market. You will need to invest some of it into an asset though.
Car. Let’s invest $10,000 in a Ford Focus that we will put up on Turo rental car. We can say that we make a $500 a month profit from our car. Let’s do this for twenty years. I know that a car won’t last that long, however, this is just for simplicity. That brings in $120,000 over the course of twenty years. What if you bought two cars? If you don’t like the stock market, then this profit would have to go somewhere, maybe bonds or real estate.
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RV. You can do the same with a $20,000 RV. You can rent it out daily or set up a spot on your land to rent it like a spare room.
Bonds. Bonds are an alternative to a savings account. US Treasuries are rock-solid investments. They usually pay more than a high yield saving account, at least for the 30-year bonds. They also pay the interest to your bank account of choice.
Real Estate. You can look into a mobile home. Or you can use leverage (a loan) to get a more expensive home. Part of your savings would be used for the down payment.
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Leverage. Or you could go all debt on these investments. Use a full 100% bank loan. Your $40,000 in savings would then become a hedge in case something goes wrong- for example, a car gets destroyed or tenets stop paying. It is all about what you are comfortable with.
So, is savings money bad? Not inherently. Blindly putting money into savings can be dangerous. It is a place to start, not to finish. We all have different risk tolerances, and you need to find yours. Don’t let anyone else convince you to do anything you are not comfortable with. This is what can get you into trouble.
Build out your expenses, figure out your risks, and decide what investments you are comfortable with. Doing this will allow you safely exploit the investments of your choosing. Saving is not bad, hiding behind a savings account is.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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