Have you ever heard some of the horror stories of regular savings accounts? Maybe that was a bit harsh, but there is really nothing in the personal finance world, in my eyes, that is more deceitful!
“Wow Andy – you followed it up with something that was even more harsh!” Dang right I did. But hear me out – I’m not saying that the banks that offer them are being deceitful but I am saying that it’s deceitful in the way that people use them.
I know many people that will put their money into regular savings accounts and they think that they’re setting themselves up for a better future but guess what? They’re not.
You see, most regular savings accounts earn less than .1% interest! That is such an insanely small amount of interest to earn from a bank. I have oftentimes talked about how when I first started my personal finance journey, I learned that my money was sitting in an account with Fifth Third where I was earning .01% interest and it just made me so mad.
I mean, that means I earned 1 penny for every $100 dollars that was in my savings account. What’s even the point of putting it in a savings account? You have ZERO incentive to do that because the interest is so negligible!
I mean, you are technically earning money but when you compare it to inflation, you’re actually losing money…and a lot of it!
Since 2000, the average inflation rate has just been over 2%, which means that on average your money is going to be worth 2% less next year than it is this year. Of course, inflation is actually a really good thing as long as it’s controlled and intentional, but you need to make sure that you are investing your money in a way that is going to cover inflation, at THE LEAST! In other words, you basically need to be making at least 2% on your money to stay steady.
The same theory goes to your salary and how you’d need to be getting at least a 2% raise to stay in the same boat because if expenses increased 2% and your money isn’t going up that much, your purchasing power would be worth less than it would be currently.
Imagine this situation – you think that you’re being smart and stashing money away with the intention to pull it back out in 30 years. Sure, it’s not much, but you’re going to save $1000 and not touch it again as a little bonus for when you retire! I’m also going to assume that you’re earning .1% interest, which is 10 times more than I earned with Fifth Third, but still complete trash…lol.
Let’s see how things would shake out!
As you can see, your money wouldn’t have even grown by $30 over your initial investment of $1000. But your purchasing power would’ve shrunk by nearly $750 because inflation was growing by 2% every year. So, in other words, you’d need to have $1020 in Year 2, $1040.40 in Year 3, so on and so forth just to be able to buy the same things.
You’re 30 years into saving your money and you’re just now finding out that you’re worse off than when you first started saving in the first place. That would be such a tragic but realistic situation.
So, what’s the best way to combat this? Well, the simple answer is to evaluate your different investment options and make sure that you’re properly aligned. Of course, there are the obvious answers like investing it in the stock market or paying extra on debt, but I think that there are some other options as well that are more similar to putting your money into a savings account.
You see, typically when you’re putting your money into a savings account it’s because you’re looking for a very safe investment. There’s nothing wrong with doing this, but you just need to make sure that you’re making your investments as efficient as humanly possible!
In my opinion, I think that 100% of your money needs to be in the market with the exception of an emergency fund or a short-term purchase that you’re saving for like a car, vacation or something similar. You see, over the course of time, investing in the stock market has played out to be beneficial for investors over and over again.
In fact, the market has always gone up over the course of time unless you have gotten in your own way and sold your stocks or done something crazy! Within the last week I had someone tell me, and it was a debate honestly, that the stock market is risky. NO!
The stock market isn’t risky.
Is it volatile? Most definitely!
Risky? Absolutely not.
How can something be risky that averages an 11% return over the last 70 years? The key is that you have to be ready to invest for the long-term.
Personally, I also invest for the short-term, but if I am putting my money in the market for a time period of 3 years or less then I am simply accepting the risk that comes with it. I recommend for most people that have an investing time period of 3 years or less to really think about looking at a much safer investment tool where they know they aren’t going to lose any of the money that they have saved up.
Two of the best options that I think we have available to us are using CDs and then also looking at high-yield savings accounts.
High Yield Savings Account
This is likely the best way for you to stash your money away and earn some interest on it to stay near inflation or even potentially beat it. I personally use Ally as my High Yield Savings Account provider but I know that there are many other options out there as well.
NerdWallet is always updating their list of the best high yield savings accounts and showing the APR that you can receive from them and currently there are many options with an APR at 1%+ including American Express, FNBO Direct, Salem Five Direct, Bank5 Connect, CITBank, Barclays, CapitalOne, HSBC and TABbank.
All of these banks are FIDC members but I am willing to bet that you likely haven’t heard of many of them, or at least that I know that I hadn’t and that is somewhat of a bit of uneasiness for me. When I was looking my high yield savings account, I obviously wanted a great APR but I also was admittedly a bit nervous about putting my money into one of these online-only accounts.
Ally had a great rate at the same, although not the best, but it was one company that I had heard of before so it gave me some peace of mind.
At the time, their APR was 2.3% which just eclipses the average inflation rate that I listed previously so I felt very comfortable putting my money there.
In addition to the great yield, I like Ally because they have a very user-friendly platform. It’s sleek and easy to navigate, and the thing that I love the most about it is that you can setup different buckets that you want to save money for.
For instance, I have a certain amount set aside for an emergency fund, to pay for my schooling, a category called NEBP (Non-Emergency Big Purchases), and then just anything else that I might want to save for in the short-term. That would include a landscaping project and a vacation fund as well.
You can have up to 10 of these buckets and they all earn interest but it just helps me remember why I have certain funds set aside and it keeps me from mistakenly using them for other things!
Sure, this isn’t some proprietary thing that Ally has done, but it’s something that they have added since I joined so their continued focus on improving the customer experience has kept me from looking elsewhere!
The APR with Ally is now down to 1.1% which is still on the high-end of options per that NerdWallet article so I am also very happy on that front. My advice to you is to do some research on your options and open up an account. There’s no risk and you’re just letting yourself lose money by not putting anything into a high-yield savings account!
CDs, or Certificates of Deposits, are another great option that is meant for you to essentially loan your money to the government for a set amount of time and a certain rate over that time period. It’s just a fixed income product that is going to give you some protection in your investing journey.
Typically, I am not a big fan of CDs because I think that if you’re tying your money up for a certain period of time then you need to really be compensated for your risk and I just don’t honestly see those sort of rates very often.
For instance, the rates below are from Fidelity and not only can you see that the rates are all well below the current APR with Ally of 1.1%, but they also require you to loan your money out for a certain amount of time.
Now, to be fair, a true apples to apples comparison is to look at the actual CD rates from Ally, so I’ve shown those all below as of 6/23:
Again, the rates are still not really anything to write home about. Why would I want to invest my money into a CD where I couldn’t get it back for a certain period of time at a worse interest rate than I am receiving today? I would really only want to do this if I thought that the rates from Ally were going to keep going lower, and that certainly is a possibility as they have been cut in more than half since I signed up at a 2.3% interest rate.
One thing that Dave has talked about in the past, which I think is a genius way to invest in CDs and not completely lose your liquidity, or cash flow, is to think about using a ladder method.
For instance, if you were going to invest in a 12-month CD and you wanted to put in $12,000, you could simply break that down into smaller chunks and do 12 different CDs, all of which would be spread apart by 1 month, as shown below:
Doing so would allow you to keep some money on hand while you’re implementing this strategy but then also as the CDs would expire every 12 months, you would have $1000 (plus any interest earned) that you then could allocate towards something if need be.
For instance, say a major expense comes up in the middle of March in the following year, meaning you had already put your entire $12K into CDs. You likely would’ve already reinvested those funds back into another CD, but in April you would have a CD expiring where you could get the $1000 + interest earned. You could take that money and then apply it towards the major expense.
Then, in another month, you’d have another $1,000 + interest earned that you could put towards the expense or roll it into another CD.
You’re essentially keeping all your money invested in a CD, if that’s your preferred method, but also keeping some liquidity at the same time – best of both worlds!
For me, personally, I prefer just to put it in a high yield savings account because it is the most liquid position where I can have my money within 24 hours and to me, that’s more important than an extra couple tenths of interest, but it’s all a personal choice!
Do the math, think about what the most important factor for you is, and invest appropriately! But most importantly – get out of those regular savings accounts!