This Big Reason Is Why You Shouldn't Keep Money in Your Savings Long Term
- It's important to have some money in a savings account.
- You should only keep money in savings if you'll need it soon.
- Otherwise, you need to invest it to earn better returns.
Don't leave your money sitting in your savings account -- do this instead.
Putting some money into a savings account is a smart financial decision. You'll want to keep your emergency fund in a savings account so you can access it easily. If you're saving for anything else that you're going to need to use the money for within the next few years, the cash also belongs in savings.
But if you are saving for the long term, a savings account is a terrible place to put your funds. Here's why.
There's an important reason not to keep your money in savings
Keeping your money in savings over the long term is a bad idea for one big reason: Your potential return on your funds is going to be capped at a really low level.
Savings accounts typically pay you a small amount of interest, but the key word there is "small." Right now, savings account rates are higher than they've been in a long time due to the Federal Reserve raising interest rates. And rates are still capping out at around 2.5% even for high-yield savings accounts (and are much lower on standard accounts).
Earning 2.5% on your money isn't very good. If you're hoping to retire some day, you would need to save a huge amount of money to be able to do that because your funds wouldn't be working very hard for you and you wouldn't benefit much from compound growth as a result. Compound growth is what happens when your funds earn returns, and then interest gets applied to that amount, enhancing your total.
Growing your savings is hard at a low interest rate
If you wanted to end up with a $1 million nest egg and you earned just 2.5% on your money, you'd need to save a shocking $1,898.13 per month if you started 30 years before retirement. That's just too much for most people. You need to get a boost from an investment that actually pays you a more reasonable return on investment (ROI) -- especially since this is likely a best-case scenario and chances are your savings account won't consistently pay 2.5% over 30 years.
Worse yet, in many cases, the money you have sitting in savings not only won't grow much but will actually end up losing value. That's thanks to inflation, which is the rising price of goods and services.
The target inflation rate set by the Fed is 2% annually, so if your savings account rate dips below a 2% ROI, the money you have invested loses buying power and you end up with less than you started with in real terms. In times when inflation is high, like now, you could lose a lot of ground.
What should you do with your money instead?
If you need your money soon, you should keep it in savings even though you won't earn a generous return. You can't take a chance with funds you may have to access within a short time period.
But if you're investing for the long term, opt for a brokerage account and invest your funds. You can pick individual stocks or keep it simple and put your cash into an S&P 500 fund. This is a fund that gives you exposure to about 500 large U.S. companies, and it has consistently produced average annual returns of around 10%.
Let's go back to our earlier example. If you can invest and earn average returns of 10%, you'd only need to put aside $506.60 each month to retire with $1 million, which is much more doable.
Don't leave your money to lose ground. Get your brokerage account open today if you're saving for anything that's more than two to five years in the future. You'll be glad you did when your funds work hard to help you grow your wealth.
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