I Keep My Savings Account Balance as Low as I Can. Here's Why

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KEY POINTS

  • Having a savings account is important, but I don't want to keep too much money in it.
  • There's a downside to having too large a balance in a savings account.
  • My investment account is a better place to keep money, as it will lose value due to inflation if I keep it in savings.

Keeping too much in savings could mean missing out on opportunities to do better things with the money.

Like many people, I have a savings account open and I transfer money into it on a routine basis. But while I believe it is important to have some money in savings to prepare for my emergencies and to save for big expenses, I actually keep my account balance as low as possible.

There's a very good reason why I don't like to have too much money in savings. Here's why I keep my savings account balance lower than you might expect.

Why I keep my savings account balance to a minimum

Although I know having some money in savings is essential, I keep my account balance to the minimum for one simple reason: savings account interest rates are very low. Even with a high-yield savings account, it's really difficult to find rates that are much above 2.00%.

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Since you don't get paid much interest on money in savings, the best case scenario is that you break even after inflation and your money doesn't lose ground. If inflation is about 2% per year (which is what the U.S. Central Bank believes is an ideal inflation rate), then the price of goods and services increases goes up at about the same rate as the best high-yield savings account pays. This means that while I'm not really making money, the cash I have in savings can still buy the same amount when I withdraw it as it did when I put it in.

Right now, though, inflation is far above 2%, which means the money in savings is seeing its value erode. While it is safe in the account, by the time I take it out, the buying power of my money will have fallen and I will not be able to get as much for it.

And while inflation will stop surging sometime (hopefully), interest rates on high-yield savings accounts are likely to drop at that time. So, even when prices stop going up so much, chances are good the rate my bank pays will go down and I'll still end up losing ground or barely remaining above water.

Now, this doesn't mean I don't keep any money in savings. I want to have liquid cash accessible for emergencies and I keep money in savings if I am going to be using it within the next few years.

That's because I can't lose the funds in my high-yield savings account, so I won't have to worry about whether I'll have less than I put in when I go to take out the cash. I also won't have to worry that my investments may be temporarily down at the time I need to withdraw the money, thus forcing me to choose between selling and locking in losses and waiting to make a purchase.

So, I keep the minimum I need for my emergency savings and short-term goals in my savings account and nothing else.

Here's where I put my extra money instead

As far as the rest of my money, anything else I am putting aside for the future goes into a brokerage account. There, it can be invested in other things -- such as ETFs -- that are much more likely to provide returns that exceed the annual inflation rate.

While there are risks to investing in the stock market, I'm still confident it's a better place for most of my money that I won't need soon. This is because investing in equities over time is one of the best ways to build wealth. So, I keep what I need in savings and invest the rest because this will best help me accomplish my goal of building a financially secure future.

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