No matter your income or stage of life, you need money set aside in the bank for emergencies. Ideally, your emergency fund should contain enough cash to cover three full months of essential expenses at a minimum. But while it's a good idea to keep emergency cash in a savings account, here are three scenarios where it's best to stash your money elsewhere.
1. It's for retirement
The money you're setting aside for retirement should be kept outside of a savings account for a couple of reasons. First, you need your money to grow at a faster pace than what a savings account will allow for. Right now, many high-yield savings accounts are paying somewhere in the vicinity of 4% to 4.5%, but today's rates are unusual. Historically, they've been lower on many occasions.
What's more, while a risk-free 4% or 4.5% return on your money may be nice, the stock market's average return over the past 50 years, as measured by the S&P 500, has been 10% before inflation. So if you keep your retirement nest egg in a savings account, you might lose out on the higher returns you need to outpace inflation over time.
Also, a savings account won't give you any sort of tax break on your money. The interest you earn on your money will be taxed at the same rate as ordinary income -- the highest rate you're subject to. A better bet is to save for retirement in an account like an IRA, where your contributions go in tax-free.
2. It's for college
Just as you need your retirement savings to grow at a pretty rapid rate, so too do you need to see your college savings take off nicely. With retirement, you might have a 40-year window or longer to save. With college, you may be limited to an 18-year window if you want your kids to start as soon as they graduate high school.
There are different accounts you can use to save for college. But if you want to enjoy some tax savings, you may want to consider a Roth IRA or a 529 plan. Both of these accounts allow for tax-free investment gains, and withdrawals are tax-free as well (in the case of a 529, tax-free withdrawals only apply to qualified educational expenses).
3. It's for a really far-off goal
Generally, it's not the best idea to invest money you expect to need within seven years. It might take the stock market a long time to recover from an extended slump, so if you're saving for a near-term goal, keeping your money in the bank is generally a smarter bet.
But if you're saving for a far-off goal, like buying a second house, and you don't expect to reach that goal for a good 10 to 15 years, then investing your money could get you closer to meeting that objective. And in that case, you're better off keeping that money in a brokerage account.
A savings account is a great home for your emergency fund. And if you're socking away money to pay for holiday gifts in December or take a vacation at the start of 2024, then a savings account is probably your most optimal choice. But if you're saving for retirement, college, or another far-off goal, then it's best to put your money to work by investing it, even if that means forgoing the safety of a savings account.
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FAQs
The interest rate on savings generally is lower compared with investments. While safe, savings are not risk-free: the risk is that the low interest rate you receive will not keep pace with inflation. For example, with inflation, a candy bar that costs a dollar today could cost two dollars ten years from now.
What are 3 disadvantages of saving? ›
The disadvantages of using personal savings:
- You're limited to what you can afford: your savings may only get you so far.
- It's risky to spend all your savings: you might need your savings for a personal emergency.
- Your responsibility for success: having more people behind your business could lead to more success.
There are also a few potential downsides to savings accounts.
- Interest Rates Can Vary. ...
- May Have Minimum Balance Requirements. ...
- May Charge Fees. ...
- Interest Is Taxable.
The interest rate on savings generally is lower compared with investments. While safe, savings are not risk-free: the risk is that the low interest rate you receive will not keep pace with inflation. For example, with inflation, a candy bar that costs a dollar today could cost two dollars ten years from now.
Why shouldn't you keep your money in the bank? ›
Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind. Anything over $250,000 in savings may not be protected in the rare event that your bank fails.
What are two disadvantages of saving money? ›
You might also enjoy…Budgeting Disadvantages (and How To Overcome Them)
- The Disadvantages of Saving Money. Debt is Expensive. Fear of Missing Out (FOMO) Your Money is Losing its Value. You're Missing Opportunities to Increase Your Wealth.
- Am I really at a disadvantage if I save?
Savings Account: Pros & Cons
| Pros | Cons |
|---|
| High interest earnings will grow your money exponentially over time. | Limited to certain types and amounts of withdrawals and transfers. |
| You can withdraw at any time during your bank's business hours. | May require a minimum balance to avoid paying fees. |
2 more rowsAnswer and Explanation: C) Protections against inflation is not a benefit of a savings account. Inflation is a decrease in the value of cash over time due to financial and monetary policy that means that prices of goods and services increase faster than the value of money.
What are the disadvantages of a bank savings account 4 points? ›
Some of the disadvantages of Savings Accounts are:
- Low-Interest Rates. Savings Accounts offer an interest rate that ranges between 2.50% to 7% per annum. ...
- Fees. ...
- Minimum Balance Requirements. ...
- Accessibility Restrictions. ...
- Opportunity Cost.
Without a safety net, unexpected expenses or income disruptions can result in debt, stress, and even financial ruin. Missed Opportunities: A lack of savings can limit your ability to seize life-changing opportunities, such as investing in education, starting a business, or buying a home.
Having $20,000 in a savings account is a good starting point if you want to create a sizable emergency fund. When the occasional rainy day comes along, you'll be financially prepared for it. Of course, $20,000 may only go so far if you find yourself in an extreme situation.
What is one con of having a savings account? ›
One important disadvantage of a savings bank account is that the interest rates offered by the bank are variable. This means that the bank has the right to make changes to the interest rate.
Is a savings account no risk? ›
A savings account can give you access to cash when you need it. Involves minimal risk. Your funds are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
Where do millionaires keep their money? ›
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Where do billionaires keep their money? ›
Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.
What is the least safest bank? ›
The worst banks are Wells Fargo and Citibank. Wells Fargo is the worst bank overall, with a high percentage of unresolved complaints and loss of Better Business Bureau accreditation. Citibank has a string of high-profile cases involving operational chaos and regulatory fines.
What is the disadvantage of not saving money? ›
Choosing not to save money can lead to several negative outcomes, both immediate and long-term: Financial Vulnerability: Without a safety net, unexpected expenses or income disruptions can result in debt, stress, and even financial ruin.
What are the disadvantages of saving money at home? ›
Why is it a bad idea to keep cash at home?
- The money can be lost or stolen. Hiding cash under the mattress, behind a picture frame or anywhere in your house always carries the risk of being misplaced, damaged or stolen. ...
- The money isn't growing. When cash doesn't grow, it loses some of its value.
The disadvantages of saving money for students include low salaries, economic hardships, inadequate financial literacy, and the belief that they have more time to accumulate wealth before retirement.
