The Financial Pitfalls of Keeping Money in Savings Accounts
Savings Account Returns Versus Long Term Investments
When it comes to saving money, many people turn to savings accounts as a safe and secure way to store their funds. While savings accounts are a great way to store money for short-term needs, they are not the best option for long-term investments. Savings accounts offer low returns, usually around 0.01%, and are not designed to keep up with inflation. This means that the money you save in a savings account will not grow as quickly as it would if you invested it in the stock market or other long-term investments.
For example, if you invested $10,000 in a savings account at 0.01% interest, you would only earn $10 in interest after one year. On the other hand, if you invested the same amount in the stock market, you could potentially earn much more. According to the S&P 500, the average return on investment for the past 10 years has been around 10%. This means that if you invested $10,000 in the stock market, you could potentially earn $1,000 in interest after one year.
How Keeping Money in Savings Accounts Cost You Money
Another financial pitfall of keeping money in savings accounts is that it can cost you money in the long run. Savings accounts are not designed to keep up with inflation, which means that the money you save in a savings account will not be worth as much in the future as it is today. For example, if you save $10,000 in a savings account today, it will be worth less in 10 years due to inflation. This means that you will have less purchasing power in the future than you do today.
In addition, many savings accounts charge fees for certain services, such as overdraft protection or account maintenance. These fees can add up over time and can significantly reduce the amount of money you have saved. For example, if you have a savings account with a $5 monthly fee, you will have paid $60 in fees after one year. This means that you will have less money saved than if you had not paid the fees.
Disadvantages of Keeping Money in Savings Accounts
Another disadvantage of keeping money in savings accounts is that they are not very liquid. This means that it can take several days for your money to be available for withdrawal. This can be a problem if you need access to your money quickly. In addition, many savings accounts have withdrawal limits, which means that you can only withdraw a certain amount of money each month. This can be a problem if you need to access more money than the limit allows.
Finally, savings accounts are not very secure. While they are insured by the FDIC, they are still vulnerable to cyber attacks and other forms of fraud. This means that your money could be at risk if your account is hacked or if someone steals your account information.
Reasons Investing Hedges Against Inflation
Investing is a great way to hedge against inflation and ensure that your money will be worth more in the future. Investing in stocks, bonds, and other long-term investments can help you earn higher returns than you would with a savings account. This means that your money will be worth more in the future due to the higher returns.
In addition, investing can help you diversify your portfolio and reduce your risk. By investing in different types of investments, you can spread out your risk and ensure that you are not putting all of your eggs in one basket. This can help you protect your money from market volatility and ensure that you are not taking on too much risk.
Finally, investing can help you reach your financial goals faster. By investing your money, you can potentially earn higher returns than you would with a savings account. This means that you can reach your financial goals faster and have more money to use for other things.