You don’t have a savings account? Well, let me tell you that it’s completely fine.
These are actually terrible financial products for many people.
I got rid of my savings account over 10 years ago when I realized how bad of product they are and it has never been an issue.
How? I use multiple, redundant ways to keep my money invested, why still being able to access liquidity when needed.
Life’s too short to save and let your money rest idle. With that being said, allow me to show you why having a savings account is too over-hyped.
1. Money in Savings Accounts Is Losing Value
With current savings account rates well, well below inflation, if you have a chunk of money in your savings account, you are essentially locking in a loss. I actually got a mailer from a bank this week trying to sell me on a savings account “bragging” that their interest rate was 0.18% (historically inflation in the US since the civil war has been between 2-4% per year). This is also at a time when ~30% of US money in circulation was printed in the past year as well (2021).
So money in a savings account is actually doing worse than just sitting idle. While maybe giving you the satisfaction of having something to draw from in case you fall on tough times, its real purchasing power is continuously declining.
No matter what, it’s not working for you when it’s just relaxing in your savings account.
So what should you do? If you are like me, here’s what you need to do to put that money to work.
2. Keep Your Money Invested and Use It as an Earning Asset
Instead of a savings account, invest money you would have put into one.
I know that money is available to me when I want it, and in the meantime, it’s invested somewhere benefiting me in the long run. My money is no longer just sitting in an account or an expensive safe; it’s being used to earn more money!
Hello random author on the internet, what should I do when I have an unseen expense knocking at my door? Don’t worry; I have your back. Read the next section to learn how you can tackle such a situation.
3. Easy Example
Your monthly living expenses are $3K. Conventional personal finance advice will tell you that you need 3 – 6 months of monthly expenses in savings accounts. So $9-18K. Let’s call it $13K. Assume, on average, a 7% annual return in the S&P500 and a 0.1% savings account interest rate, that would generate, annually:
- S&P500: $910 … not bad! Of course this is just on average, you have to be willing to ride out the up and down years too.
- Savings account: a whopping $13. Imagine that, $13 for getting to use your $13K for a year! And since we use a fractional reserve banking system, most banks are actually turning around and lending out around 90% of that $13K! If they charge an average interest rate of 5% then they’re making $585 in revenue using your $13K and only sharing $13 of that revenue with you!
The money invested is still yours. If you need to sell, stock trades for example settle in 3 days, so you can still access that money quite quickly if you need it.
If you need to pay faster than that you can simply use a credit card and you won’t need to pay until the next billing cycle. Plus, you get points with most credit cards (which is why, like many people, I run as many of expenses through a card as I can even though I don’t need to, I just pay in full every month).
With an SBLOC or a margin loan you have an additional layer of liquidity to access your cash at low rates (usually 7% or less) if you want to defer paying even longer.
Savings accounts are great for banks and terrible for you. It gives banks the capital they need to use to turnaround and lend out. Meanwhile they pay you pennies. You can easily invest your money instead and still have plenty of access to liquidity if you need it.