Is Putting Your Extra Money In A Savings Account Good?

One of the main things that we are being told today is to save our money. Saving your money will allow you to have a future benefit from it. Dave Ramsey even suggests that you are saving money for up to a years worth of expenses to ensure you can plan for a time of no employment. However, with all of this savings talk, what does it actually mean or what should it mean?

Saving Money

The basis of saving money is a simple one. You are putting money that you are not using or plan to use any time soon somewhere safe. A hundred years ago this might have been your mattress. Today, most people are putting their money in a savings account to then be able to earn some interest. Again, this is a very simple concept. Unfortunately, this is very difficult for some. Depending on your current situation, you may be able to put away a reasonable amount of money every month into an account, whereas others may not be able to put any away. Herein lies one of the first roadblocks. Quite often a budget can help overcome this obstacle.

Savings Accounts Are Worthless

Understanding what a bank does with the money you deposit will help you to understand why a savings account is useless. Most banks hold accounts for people either in savings or a checking account. Both allow you to store your money to be used immediately or for later. However, both of these types of accounts today provide a very minimal interest rate back on your money (maybe .01%).  In many cases you might only receive a few cents a month. The bank side however is using these funds to loan out to people buying cars, homes, and other things. They are making money back on this money through interest on the loans. Often these are between 2%-5% in today’s markets. So while you are providing the liquidity for these banks to make a ton of money, you are getting very little in return. This is why I keep very little savings in these banks.

So What Should You Do?

Each of you will have to assess what your current situation is. However, it would this financial expert’s opinion to get involved with some type of financial advisory service. I personally use Vanguard. Often there is a minimum for certain services, but it would be worth it. These advisors will invest your money in different ways ways on your risk level. If you are unsure of if you will need the funds in a short time, then they can work to that with your money. Otherwise they can be aggressive with your money as well. The higher the risk the higher potentially the reward. Though, you are more than likely going to get a higher rate of return than a simple .01% on your money. Also, keep in mind with many of these programs there is a small fee (mine is .37% every quarter based on the balance). In the same manner, in an emergency these funds should be available to you within a few days if needed.

Closing Note

In closing, I would suggest to not leave your extra savings in a savings account. Instead do your research and talk to licensed professionals about having your money work for you. The worst thing you could do is nothing!