It’s OK If Your Savings Account Doesn’t Make You Money

One of the basic pieces of advice is to make sure that your money is working for you.  And of course you want that work to yield maximum returns.  Finding good investments at low cost is a perfect example of a way to make this happen.  While you definitely want to make your money work for you, don’t get carried away.  See, some people fall into the belief that every single dollar has to make money.  While this would be nice in a perfect world, it isn’t always possible.  This is no more true than with a savings account.

The Savings Account: Then And Now

Until the recession that started around 10 years ago, a savings account was a great way to earn a little money.  You could stash money away, risk free, and still earn some interest.  It wasn’t a whole lot, but it was generally enough to keep up with inflation.

Then, the recession hit.  In order to spark the economy, interest rates fell to all time lows.  This was great for borrowers, but for savers it meant that interest rates on savings accounts fell to zero, or pretty darn near that level.  While interest rates have creeped up a tad, they still remain at practically historic lows.  Again, it’s great if your borrowing, but not so much for savers.

Should You Ditch The Savings Account?

With savings accounts paying nothing or close to it, the money you keep there isn’t earning you anything.  In fact, when you factor in inflation, a savings account could actually be costing you money.

So the logical question becomes whether it is time to get rid of the savings account.

To that, I say, take a deep breath, relax, and hold on to your savings account.

In short, no.  Don’t get rid of the savings account.

Why A Savings Account Matters

The fact is that a savings account still holds value in the personal finance world, and should be part of almost every household.  The value, however, isn’t in the interest it pays.  Savings accounts provide value in the easy access to money and the security in knowing that you have money available quickly.

Think of some of these possible scenarios:

  • What if your credit cards get stolen and you need to pay for stuff before new ones come up?
  • What if you have a natural disaster strike and cash becomes the only way to get goods?
  • How about if an unexpected bill comes your way?

In many cases, the window for getting access to money held in different types of accounts is shortening.  Without a savings account, you could theoretically sell an investment in a brokerage account, and transfer the money over within a day or two.

That’s all and good, but that’s still an entire day or two that you have to wait.  Is that a matter of life and death?  I certainly hope not!

Keep A Nominal Amount In Savings

The smartest strategy is to keep a small amount in your savings account.  If you have $100,000 in savings, chances are you won’t need access to that amount, and the potential lost earnings is meaningful.

But $2,000.  That’s certainly manageable.   And if that costs you, say, 2% a year, that amounts to $40.  I think that little bit of lost income is worth the peace of mind of knowing that you have quick access and are covered for anything that comes about that might require up to $2,000.

Don’t you?

Readers, what do you think?  Do you think savings accounts are obsolete?  Do they still hold value?  What is your strategy with a savings account?  Let me know in the comments below.  Thanks so much for reading!

10 thoughts on “It’s OK If Your Savings Account Doesn’t Make You Money”

  1. My question is….when the interest rate dynamics return to the norm…what influence this will have on folks savings/spending habits? I remember the “good ol’ days” when passbook interest rates were at 5% and “working the float” was an art form….

  2. I use my savings account as a safety net. If I want to make an investment, I want to have cash on hand. If there is an emergency, I also want to have cash on hand.

    I look to have about $10k in cash at any given time so that I can go to bed and sleep well 🙂

    Thanks for sharing MB

  3. Thank you! And exactly so…

    Last time savings accounts were paying nil, I started keeping the emergency fund in the money market. This helped marginally. Just.

    No money is forthcoming from anything these days, so I just put the entire year’s RMD into checking. Wouldn’t make more than a buck or two more in the credit union’s savings account, or in their other low-rent instruments.

  4. I think of a savings account as insurance, and don’t mind sacrificing some return for the security you get in exchange. There are a few better options out there – for example, I-Bonds are also secure and are currently paying 2.76% – but not many. Hopefully one day savers will stop being punished and instead be rewarded through higher rates again.

  5. As an early-retired person, I keep a LOT of cash on hand. A couple years’ of living expenses in fact. Why? Because the average correction lasts 18 months and I don’t want to have to draw down investments while the market is in turmoil.

    If interested in the math and science behind that, you might want to check out Nick Murray’s book, Simple Wealth Inevitable Wealth. Great read for us finance geeks. 🙂

    Oh, and we keep our cash at Ally Bank. It’s only 1% but better than most other options.

    • Yes, I have an account at Ally as well. It’s sort of the ‘second level’ money that I wouldn’t have access to today but could use it to, say, pay a credit card bill if an emergency came up.

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