1) Savings Accounts = Low Interest
The interest rates for savings accounts are too low. You should not put your money in the bank, it’s better to invest your money instead. When you invest your money you could earn even more than just depositing it in the bank.
Savings accounts are meant to help people save their money, and it’s better to save it rather than keeping your money in there. Save your money until you have performed sufficient research to make a wise investment.
Investments typically have much higher rates than the interest on savings accounts. Perform diligent research, find an investment that you’re interested in, and make a wise decision to invest your money rather than just saving your money.
2) Investments Have Higher Returns Than Savings Accounts
The vast majority of all investments have a much higher return rate than the national average savings account interest rate. At the time of writing this article, the average savings account interest rate is 0.40% (according to bankrate.com).
There are several options that may max out around 1-2% at the very highest for savings accounts, but these are the exception, not the “norm”. Nearly every investment that has been able to withstand any lengthy amount of time in the market will return higher than 0.40%. Otherwise, it will be forced out of the market and viewed as a non-viable option for high returns.
3) Investing Expands Wealth, Savings Account Preserves It
Investing your money creates wealth, whereas putting it in a savings account maintains the amount with a very fractional increase. If you invest your money, it can compound and generate a much higher return than the interest added to a savings account.
Compound interest allows you to receive more of what you invested at a faster rate. When investing your money, you have a much more substantial effect by tapping into the power of compound interest. For fun, play around with a few numbers on a compound interest calculator. It will surely blow your mind.
Click here for a quick link to test it out. Use 10% of your annual income as the “initial investment”. Now enter varying ranges of interest percentages from 3% to 20%. Lastly, enter varying timeframes from 5 years to 75 years. You’ll notice the exponential effect towards the end of long periods of time, that’s what you want and you’ll need to start early in order to achieve it!
Note: this is only showing the compounding effect and doesn’t take inflation into account. If you apply an average 2.25% inflation, that number will be even larger!Â
4) Average Inflation Is Higher Than Savings Account Interest
The national average inflation rate is between 2-3% over an extended period of time. In the majority of financial periods, the average inflation rate is higher than the interest rate for a savings account.
The average inflation rate from 1913 to 2020 was 3.10% (according to inflationdata.com). There are virtually zero reputable banks that I’ve found after days of diligent research which are offering savings accounts with interest rates over 3.10%. Therefore, your money will lose value (inflation) at a faster rate than the return on savings (account balance interest) while your money is kept in the account.
Use your capital to produce more money rather than giving it to the bank which will pay you back an interest amount lower than the devaluation of said amount. The last 87 years of American inflation rates prove to be substantially higher than the average savings account interest rate.
5) Investments = You Make Money, Savings Account = Bank Makes Money
As soon as you deposit your money into a bank, they immediately leverage it for cash-producing assets that will bring a higher return than the interest they are paying you. They get to pocket the delta as profit.
Here’s an example:
Let’s say a bank has $1 million in savings. They might invest that money by lending it to someone who is buying a house for $700,000. The person buying the house will place a deposit of 30% ($210,000) and sign a legal contract called a mortgage ($490,000) that pays the bank back over time plus interest. The bank will take that $210,000 and buy roughly $190,000 worth of a government bond (these bonds are safe because they’re backed by the full faith and credit of the US Government).
Now let’s say you deposit $10,000 into that same bank. They don’t just place your money in an interest-bearing savings account. They use your money to leverage more assets for themselves by lending $9,000 of it and keeping the rest as reserves. In this example, they lend out $9,000 (which goes towards the mortgaged $490,000) with an annual rate of 5%. Therefore, the bank receives 5%, pays you 0.40% in interest, and then keeps the rest as profit.
6) Investments Give You More Control & Larger Variety
When investing your money, you have a larger range of options to leverage your money rather than a standard savings account. Instead of putting your money in a savings account and losing money to higher inflation rates, investing gives you more options.
There are thousands of different types of investments including real estate, stocks, bonds, ETFs (exchange-traded funds), mutual funds, gold, silver, cryptocurrencies, and more. Each type of investment is based on the different markets that they are related to and can potentially provide a higher return than putting your money in a savings account or other low-interest accounts.
This puts the power into your hands and gives you a wider range of variety to choose from in order to reach your financial goals. Perform your due diligence, research thoroughly, and invest wisely.
7) A Savings Account May Limit Number of Transactions
Even if you assumed a savings account was a good idea, most banks will limit the number of transactions you are allowed. However, with investing, you are able to execute as many transactions as you wish.
The Federal Reserve Board Regulation D is a federal law that limits the number of transfers/withdrawals to only 6 per month. You are only allowed to make six different transactions monthly, which could be very restricting.
This is another reason why not to keep your money in savings accounts for the long term. They are low-interest and there are several regulations governing how you are allowed to use and operate your funds. I personally would prefer to have options with higher interest, more diverse opportunities, and without transaction limits.
Thank you so much for reading this article until the end. I hope that you found something valuable that you could use in your life. Please consult a financial professional for advice, these are solely my personal opinions. Let me know in the comments down below what is your favorite type of investment. I look forward to hearing from you.
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