How to Become Rich: Saving and Investing – Why You Don’t Make Money in Bank Accounts

Saving money (especially in a deflated economy) can provide financial peace of mind as you build a war chest and gain financial security through economic highs and lows. But the savings accounts available to you through main-street banks are designed to make them money, not you. Don’t get me wrong, saving money is #1 on my ‘must-dos’ for becoming financially fit. However, I just don’t think a bank savings account is the smartest place for your hard-earned money. Here’s why.

Money In the Bank is Safe But…

There are only really two benefits of saving into a savings account as far as I can see:

  1. The Habit & Convenience – The habit of putting away at least 10% of your earned-income and the convenience of setting up a bank savings account. We have many more Investing Help Articles Now Available.
  2. The Guarantee – The government guarantees your money is safe (up to $100,000 usually however because of the recent financial crisis this was increased to $250,000 in the US until 2014)

The fact that money can usually be withdrawn from savings account with little or sometimes no penalty is the flip side of a coin that’s called “little or no benefit”. You pay a price for this flexibility.

Saving: The Long and the Short of It

The habit of saving is long term but the tactic is short. What I mean is the habit of saving money is a long-term, life-long habit. However, saving money into a bank savings account is a short-term tactic. Your money should never be left sit in a savings account more than 6-12 months because the interest rate given by the bank is unlikely to ever beat inflation. There are 4 main types of savings accounts.

  1. A demand account – variable rate of interest; allows you to withdraw your money immediately if you need to.
  2. A notice account – variable interest rate but you must give notice to withdraw money, typically one or more months’ notice. In return, you get a better rate of interest.
  3. A term/fixed-rate account – fixed rate of interest once you leave your money for a fixed period of time, say one or two years. If you need to withdraw your money earlier, you will usually get less interest.
  4. Guaranteed Bonds – similar to fixed term, this is a fixed rate accounts but you may need to invest a lump sum of at least €5,000. You get a guaranteed rate of interest provided you do not withdraw your money until the end of the savings term, which is generally between three and five years.

The type of savings option you choose depends on the goal of your savings strategy. It’s essential to know what you’re saving the money for so as to determine when you need to get access to the money saved. It may be appropriate to have a few different kinds of savings accounts as you may be saving for emergencies, college, a new home or for retirement. The financial need/goal is different in each case so the vehicle through which you save and the amount saved is determined by the final need/goal. In this case, give each financial goal a dollar amount and time frame.

Why Interest Rates Don’t Mean Very Much

It’s vital to understand that banks can quote interest rates that compound daily, weekly, monthly, quarterly, or yearly. When comparing one bank savings account with another, make sure you ask your bank for the Annual Percentage Yield (APY) figure in addition to the interest rates. Over a 12 month period, an interest rate that compounds yearly could yield less money than a lower interest rate that compounds daily. Banks typically quote both interest rates and APYs, but only APYs give a true representation of the yield as the APY is calculated the same everywhere. We have many more Financial Help Articles Now Available.

Automatic Saving – Set It and Forget It!

No matter what savings option you choose it’s a good idea to make the saving automatic. Set up a Standing Order in your Checking (Current) Account for say the 1st day of every month and transfer the amount automatically to your savings account.

In summary, it’s ok to automatically save money into a demand or notice period savings account but if I were you I’d be investing it elsewhere double-quick…within at least 6 to 12 months of it being there.

Why Interest-bearing Accounts Don’t Bear a Great Deal

The truth is…you don’t make any money in bank accounts (in real economic terms), simply because you’re not supposed to. Sad but true I’m afraid. The interest rates you earn on a checking (current) or savings account often doesn’t exceed the average annual inflation rate, which has been on average just over 3% since the 1920s through 2010. In short, you end up losing purchasing power as the value of your money in real terms decreases. My personal recommendation is don’t be duped by glossy advertisements, websites and posters in your local bank offering what you think are good interest rates. They’re never any good in real economic terms. Once again, the only person making money in real terms out of your saved money is alas your bank!

Savings – Where to Go Next for Higher Yields

Apart from the typical bank savings or deposit account option, you may want to consider slightly more advanced savings options such as Certificates of Deposits (CDs) or Money Market Accounts (MMAs). Please visit our website or check out my other articles on Wealth Building and Savings and Investment Strategies to find out about Certificates of Deposit, Money Market Accounts and other “more advanced” savings and investment strategies.