4 Reasons I Won’t Keep Even $1 Extra in My Savings Account

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Keeping extra money in savings may not be the smartest financial move. 

Like many people, I have money in savings. In fact, I have several thousand dollars in a high-yield savings account. The money I have in there is for my emergency fund, as well as for big purchases I am saving up for and that I plan to make within the next year or two.

I won’t keep more money than I need to in savings, though. In fact, I’ve calculated the amount needed to accomplish my goals and to be prepared for a rainy day, and I only put that amount of cash in savings and not even $1 more.

It may seem odd not to want to have more money saved, but there are four really good reasons why I keep my account balance as low as I can while still being financially responsible.

1. The money loses ground due to inflation

Savings accounts — even high-yield ones — don’t pay much interest. That’s true even though many accounts have been increasing the rates they pay in recent months as the Federal Reserve has raised the benchmark interest rate.

Because the return on money in savings is very low, money in these accounts actually loses buying power. If inflation is going up at a rate of 8% or higher (as has been the case recently) and I’m making 2% on my saved money, the cash I have in there will be worth much less in real terms when I go to spend it.

Why would I want to devote more money to an investment that causes me to lose ground?

2. I can earn a much better return by investing

I don’t want to keep more money than I absolutely have to in savings because I have better things to do with it. I want to invest it.

I have a brokerage account where I can deposit funds and put them into assets that can earn me much better returns than a savings account ever could. Specifically, I invest a lot of money into an S&P 500 index fund. This is a pretty safe investment that has provided an average 10% annual return over many decades. I would much rather earn 10% than 2% or less.

Now, I know I can’t invest my emergency fund or the money I need for purchases in the short term, because an average annual return doesn’t mean I’ll earn 10% every year. In some years, my investment balance could decline. That’s why I only invest money I won’t need for at least two to five years — so I can give it time to grow even if there’s a bad year or two.

3. The money is too easily accessible

Another reason I don’t like to keep too much in savings is because it’s really accessible. The cash is just sitting there, and I could access it quickly without having to sell any investments.

While this is a good thing if I need to tap my emergency fund, it’s not a good thing because it makes it too easy to justify taking the money out for something that isn’t really necessary. I’m much less likely to sell investments and cause my portfolio balance to drop than I am to raid my savings account.

4. I’m not getting any tax benefits for putting money into savings

Finally, when I deposit money into savings, there are no special tax perks for doing so. I would rather invest as much as I can in a 401(k), IRA, or other tax-advantaged plan than put extra cash into savings.

For all of these reasons, my savings account balance is only as big as it needs to be — and the rest of my money is elsewhere, working harder for me to help grow my wealth.

These savings accounts are FDIC insured and could earn you more than 17x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 17x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More