Former Wall Street Trader Says 'By Saving Your Money in a Savings Account, You're Losing Wealth.' Here's What to Do Instead

Savings accounts are safe, but they're not great for building wealth.

People usually feel pretty comfortable with their money in a savings account. It keeps your savings secure, and you can access that money at any time. But maybe you shouldn't be too comfortable, because one prominent finance guru says you're actually losing wealth by saving money in a savings account.

That's according to former Wall Street trader Vivian Tu in a video from her social media channel, Your Rich BFF. She says that because inflation makes life more expensive, you can't save your way to being rich. Savings account rates just don't keep up with inflation.

The math checks out. Inflation was above 7% all of last year, and even the most generous savings accounts offered about 3% to 4%. If you only have your money in a savings account, you're fighting a losing battle against inflation. There's nothing wrong with having some money in a savings account, but you definitely don't want all your cash there.

How can you turn that battle against inflation back in your favor? Here's what Tu recommends and why you should take her advice.

Make your money work for you by investing

Since Tu used to work on Wall Street, it's probably no surprise that she recommends investing. As she puts it, "You need to invest, because your money can work 24/7, and you can't."

This is excellent advice, and if you're not investing yet, it's something you should start doing right away. Once again, it's all about the math. The stock market produces an average annual return of about 10%. That makes it one of, if not the most reliable ways to build wealth.

There are down markets, and we went through one for most of 2022. But over the long haul, if you invest in the stock market consistently, you're going to make money. It also doesn't take much money or knowledge to get started.

How to start investing

If you've never invested before, you might be wondering where to start. The first step is getting an investment account, and you have a few options:

• Set up a 401(k) with your employer. Many employers offer this type of tax-advantaged retirement plan for their employees. If you have this option, it's a great way to invest.
• Open an individual retirement account (IRA). This type of account also has tax benefits, and you can open one through a stock broker.
• Open an individual brokerage account with one of the top stock brokers. This type of account doesn't offer tax savings, so investors often use it after reaching the contribution limits on their retirement accounts.

After you have an account, you need to put money into it. With a 401(k), contributions typically come right out of your paycheck. You decide how much of your salary to contribute. Some employers will also match your contributions up to a certain amount. If your employer offers this, it's almost always worth maxing out that match, because it's practically free money.

With IRAs and individual brokerage accounts, you can transfer money over from your bank account.

The last thing to do is figure out how you're going to invest. Your options depend on the account. 401(k)s typically offer a variety of investment funds. IRAs and individual brokerage accounts let you invest in just about anything. Here are some of the best ways to invest:

• Index funds: This type of fund tracks a market index, such as the S&P 500 (500 of the largest publicly traded U.S. companies).
• Exchange-traded funds (ETFs): Similar to index funds, these contain a large number of stocks. Most brokers have plenty of ETFs to choose from.
• Target-date funds: A type of fund built around a specific retirement year. The investments are adjusted and optimized assuming investors retire on the fund's target date.

If you want something simple and effective, look into S&P 500 index funds. You'll get competitive returns, because the S&P 500 has the largest companies in the stock market. You also won't overspend on fees, because index funds tend to have very low fees.

You don't need to ditch your savings account

To be clear, savings accounts aren't a bad thing. When you deposit money in a savings account, there's no risk the value temporarily drops, which can happen while investing.

That makes savings accounts a good place to put money you don't want to risk, like your emergency fund. Another example would be money for short-term savings goals, like a down payment on a home in a year or two.

Savings accounts just aren't the right tool for building wealth, so you shouldn't use them for your retirement savings. For that, you're going to get much better results by investing.