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Is A Savings Account Really A Safe Place For Your Money?

Is A Savings Account Really A Safe Place For Your Money?

| May 08, 2021
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As a result of the coronavirus pandemic, the Federal Reserve has kept interest rates at record lows to encourage people to continue participating in the housing market and other sectors of the economy. But low interest rates on loans also mean low interest rates on savings accounts, so even high-yield savings accounts aren’t currently offering attractive interest rates for savers.

Of course, this is another targeted measure by the Fed to encourage people to spend their money and boost economic activity. During an economic crisis, cash that’s hoarded in savings accounts doesn’t contribute to economic growth. But these low interest rates create challenges for responsible Americans who do want to save money for future goals or an emergency fund.

What’s Wrong With A Savings Account?

Because savings accounts today—especially accounts at brick-and-mortar banks—offer interest rates that are microscopically low, it’s actually risky to keep too much cash in a savings account. You may be wondering: How could money in a savings account be at risk? It’s not invested in stocks or bonds that are subject to market volatility or poor company performance.

The answer, my friends, is inflation. Due to the phenomenon of inflation, money loses purchasing power over time because the cost of goods and services are increasing. And while inflation may sound like something undesirable, stable rates of inflation are actually necessary for economic growth (as long as wages and salaries keep pace). 

However, it is this phenomenon that makes keeping too much cash in a savings account risky. $10,000 in 2011 is only worth $8,232.35 in 2021 because of inflation. (1) From 2010-2018, the average interest rate on savings accounts was about 0.09%. (2) If the $10,000 earned about 0.09% interest compounded annually from 2011-2021, it would only have earned $90.37, (3) not nearly enough to keep up with the pace of inflation.

What Are My Other Options?

Therefore, it’s not a good idea to keep too much cash in a savings account. There are several alternative options for people who don’t want their money to lose purchasing power. The option(s) you choose should align with your risk tolerance, your short-term and long-term goals, and the intent for the money you’re saving. Common options include keeping money in a:

  • High-yield online savings account
  • Certificate of deposit (CD)
  • U.S. Treasury securities
  • High-dividend stocks
  • Bonds
  • Blended investment accounts
  • Real estate investing

Besides these common options, we also recommend stashing as much of your excess cash as you can into your retirement accounts. Besides the obvious upside of being invested in stocks, bonds, mutual funds, and ETFs, your retirement account offers the bonus of being tax-efficient as well. Not all the options listed above are right for everyone, so we recommend researching the options that interest you and making your decision alongside a trusted financial advisor. 

Finding A Balance

For most people, finding a balance is one of the most important considerations. You’ll need to keep enough cash in a savings account to cover known upcoming expenses and in case of emergency. Only you can determine the right number for your situation, but some experts advise keeping 3 to 6 months of cash available in case of an unexpected job loss or other catastrophe.

You might also consider spreading your money among different types of accounts and investments according to risk and ease of accessibility. If you have cash invested in a high-yield online savings account, it’s more easily accessible than money invested in a brokerage account. While the money in a brokerage account is still ultimately accessible, you risk needing to access it during a period of market volatility when your investments may have temporarily lost value.

How We Help

Making decisions about where to keep your money can be complex and confusing. But each day your cash sits in a savings account is one more day you’re losing money to inflation. Therefore, it’s better to consider your alternative options sooner rather than later. If you need help making these decisions, consider partnering with a financial advisor. 

At Match Point Financial, I provide everyone with a complimentary, no-strings-attached meeting to discuss your questions, concerns, and goals, as well as my process in working with clients so we can see if we’d be a good match. To learn more, contact me by calling 352-207-8014 or sending a message here. You can also check out our online risk assessment tool to discover your risk number, which will help guide our conversation: Free Portfolio Risk Analysis.

About Chris

Chris Reed is a financial advisor and the founder of Match Point Financial. Since 2002, he has been helping people make informed choices with their money and pursue their financial goals and objectives. He started his career with MetLife and has continued seeking to provide his clients with the best possible service through A.G. Edwards, UBS, and finally through partnering with Cetera Advisors LLC and forming his own independent firm in 2010. Learn more about Chris by connecting with him on LinkedIn or register for his recent webinar Are Your Old 401(k)s Collecting Dust and Losing You Money? here.

Financial Advisor: Securities and advisory services offered through Cetera Advisors LLC, member FINRA/ SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.

Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.

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(1) https://www.in2013dollars.com/us/inflation/2010?amount=10000#:~:text=%2410%2C000%20in%202010%20is%20worth%20%2412%2C147.20%20today 

(2) https://www.mybanktracker.com/savings/faq/average-interest-rate-savings-accounts-275138 

(3) https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator 

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