The Wealthy Don’t Keep Money In Savings Accounts — Neither Should You

Every financial advisor will tell you that a savings account is a necessity in any money managing plan. They’re right, but savings accounts aren’t what they used to be. In the 1990s, savings accounts were great places to store and idly grow your money. Today, unfortunately, savings accounts aren’t all they’re cracked up to be. If you’re lucky, you will break even by keeping your money in savings. On the other hand, you also might lose money by putting it in a savings account as your long term.

Let’s talk about why.

The interest rates are garbage. 

The main reason you will probably lose money with your savings account is because of interest rates and inflation. If you don’t pay attention to these two numbers, you should. The average interest rate on a savings accounts nationally is around 0.09% or less according to the FDIC, and that applies to average as well as jumbo deposits/balances (deposits over $100k).

You may think that’s okay.

However, the problem is the average rate of inflation is 1.7%. This means you’re losing almost a whole percent every year your money stays in savings. Because of these numbers, if you leave your money in savings for more than a few years, the dollar you withdraw will be worth less than the dollar you originally invested.

You may encounter fees.

On top of low-interest rates, most savings accounts have ridiculous fees. They have fees for low balances, overdrafts, frequent deposits or withdrawals, asking for paper statements, using ATMs, and many more things I haven’t listed.

Combining an annual fee with a low-interest rate means you will definitely have a net loss in that savings account. If you’re looking for an alternative to traditional savings accounts, check out online accounts. Oftentimes these accounts offer no minimum balance and no fees.

You’re overusing it.

There is nothing wrong with a savings account per se, but making a savings account your long-term money managing plan is not the right strategy. Savings accounts are ideal for short-term money-saving. If you’re looking for a better long-term option, investing in the options we have listed below will be your best bet. The goal is to put your money in an account that will make the same or more than the average inflation rate over a long period of time.

When it comes to saving your money, a savings account is better than sticking your money under the mattress, but not by much. As a short-term plan, savings accounts are a fantastic way to keep your money safe. However, if you’re looking for a long-term way to manage your funds, consider a different method of investment.

So what are your best options for longer term saving and what do the wealthy use instead of savings accounts?

High Yield Savings Account With Online Banks

A high-yield savings account is a type of savings account that will normally pay 20-25 times the national average of a traditional savings account. Recently there have been online banks that offer higher yield rates due to the fact that they have less overhead such as physical brick and mortar locations to pay for (Bank of America, Wells Fargo, etc).

In the past, people used to hold their savings account in the same bank where their checking account was located. The reason for this was convenience and being able to seamlessly transfer funds between both accounts whenever needed. However, now with internet-only banks, as well as traditional banks that have extended their business to customers across the country using online account opening, the competition on savings rates has escalated greatly. This is great for consumers because now you have the option of keeping your money inside a “high-yield savings account” instead of the stale old savings accounts you’re used to that doesn’t even keep up with inflation and in turn causes you to lose pennies on the dollar each year.

Let’s take a look at some pros and cons as to why you may want to focus on this approach.

Pros:

• High-yield savings accounts typically will give you higher APYs than most common bank savings accounts
• Frequently have the benefit of having no monthly fees and low minimum balance requirements
• Gives you the option of being able to transfer money between your high-yield account and your other accounts
• Most of them have mobile apps just as good, if not better than traditional banking apps
• They normally are FDIC-insured just like your traditional bank account

Cons:

• Mostly they are only available online — no physical locations
• They all do not give you access to physical ATM networks
• Transfering between banls takes a bit longer in most cases, normally 24-48 hours

In summary, high-yield savings accounts are a great way to maximize your savings at higher interest rates. The whole purpose of having a savings account is so that you have some liquidity and have easy access to funds whenever you need them. By keeping that money in a high yield savings account you earn more on the dollar than traditional banks as your money safely rests.

Exchange Traded Funds (ETF’s)

ETF’s stand for “exchange-traded fund” and they are a kind of security that involves a collection of securities—such as stocks—that often follows a certain type of index, however they can be invested in any number of industry sectors or use multiple strategies.

ETFs are sort of like mutual funds; except the big difference is they are listed on stock exchanges and they’re traded throughout the day just like any ordinary kind of stock. Mutual funds aren’t traded on any exchange and they only trade once per day after the market is closed. ETFs are also generally associated with lower fees which is part of their big appeal.

When you invest your money into ETFs, it’s like you’re investing into a basket of security funds such as stocks, bonds, commodities or any combination of those. You can buy and sell them through a broker or you can do it through free apps such as Robinhood or M1 Finance. Similar to stocks, they have ticker symbols so that you can track their performance such as VOO which is a Vanguard ETF and is traded on the S&P 500 Index, representing 500 of the largest U.S. companies.

Real Estate Investing (REIT’s)

You may or may not have heard of REIT’s, but in case you haven’t, they are considered real estate investment trusts (“REIT”) and they are defined as being a company that owns, operates or finances income-producing real estate. REITs are a great way for all investors to get the opportunity to own valuable real estate, get the ability to access dividend-based income and total returns, as well as help communities grow and thrive.

REITs allow anyone to invest in portfolios of real estate assets just how they would individual stocks or ETFs – through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced through real estate investment – and the best part is they don’t have to actually go buy, manage or physically rent a property. A little fun fact is if you have a 401k, you may actually already have an investment in REITS. According to today’s stats, nearly 87 million Americans invest in REIT stocks through their 401(k) and other investment funds.

Historically, REIT’s are one of the best-performing asset classes available. The FTSE NAREIT Equity REIT Index is what most investors use as a measuring stick for the performance of the U.S. real estate market.

Robo Advisors

If you’ve ever seen a cartoon or movie where robots and AI’s are doing your laundry and acting as your personal servant then you’ll love the concept of having a robo-advisor. While they won’t wash your car or do your dishes, they offer something even better — the ability to manage your money.

Robo-advisors — think of them as auto investing services — use computer algorithms and advanced software handle your portfolio or investments. They can do most things from automatic rebalancing to tax optimization, and don’t require much of your attention or interaction unless you have questions or concerns that a human needs to answer.

When you deal with traditional management services like brokerages, you can expect to pay lots of fees or you’ll have to maintain a high balances. With robo-advisors there’s little to no requirements necessary. In many cases you’re able to get started using robo-advisors within minutes and the step by step guides usually inform you of all the risks.

Investing In A Side Hustle Or Your Own Company

They say some of the best investments you can ever make is in yourself. We wholeheartedly agree with that train of thought and that’s why we have articles for you to read such as ways to make passive income and side jobs that can make you money.

Keep This In Mind

Regardless of the long term strategy you choose, it’s important to look at the rate of inflation when it comes to growing your money. If the savings account (or whatever investment holdings you choose) is offering interest rates lower than the average rate of inflation, then you’ll be losing money annually without even realizing it. At that rate, when you finally pull your money out, your dollar will be worth less than it was when you put it in.