Saving too much can mean missed opportunities to do better things with your money.
- Having a savings account is important, but I don’t want to put too much money in it.
- There is a downside to having too large a balance in a savings account.
- My investment account is a better place to save money because if I put it in savings it will depreciate due to inflation.
Like many people, I open a savings account and transfer money into it regularly. But while I think it’s important to save some money to prepare for my emergencies and prepare for big expenses, I actually keep my account balance as low as possible.
I don’t like having too much savings for good reason. This is why my savings account balance is lower than you might expect.
Why I keep my savings account balance to a minimum
While I know some savings are essential, I keep my account balances to a minimum for one simple reason: savings account rates are very low. Even with a high-yield savings account, it’s hard to find an interest rate much higher than 2.00%.
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Since you won’t get much interest on your savings, the best case scenario is that you break even after inflation and your money doesn’t lose. If inflation is around 2% per year (which the U.S. central bank considers the ideal rate), prices of goods and services will rise about the same rate as payments in the best high-yield savings accounts. This means that while I’m not actually making any money, the cash I have in my savings can still buy the same amount when I withdraw it as when I deposited it.
However, inflation is currently well above 2%, which means the money in savings is losing value. While it’s safe in the account, when I withdraw it, the purchasing power of my money will drop and I won’t be able to get as much out of it.
While inflation will stop surging at some point (hopefully), interest rates on high-yield savings accounts will likely drop by then. So, even if prices stop rising so much, there’s a good chance that the rate my bank pays will drop and I’ll end up losing ground or barely staying above the water.
Now, that doesn’t mean I’m not saving.I would like to have liquid cash for emergencies and If I plan to use it in the next few years, I’ll save up.
That’s because the funds in my high-yield savings account don’t get lost, so I don’t have to worry about whether I’m going to take out less cash than I put in. I also don’t have to worry that my investments might drop temporarily when I need to withdraw, forcing me to choose between selling and locking in losses, and then waiting to buy.
So I keep the minimum amount needed for emergency savings and short-term goals in a savings account and that’s it.
As for the money I have left, anything else I set aside for the future goes into the brokerage account. There, it can invest in other things that are more likely to provide returns that exceed the annual rate of inflation — such as ETFs.
While investing in the stock market is risky, I still believe it’s a better place and I won’t need most of my money anytime soon. This is because investing in stocks over time is one of the best ways to build wealth. So, I save what I need and invest the rest because that will best help me achieve my goal of building a financially secure future.
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