This article is a 5 min read.
This article is a 5 min read.
When you put your money into a savings account, chances are you’re expecting to walk away slightly richer at some point in the future.
If you are placing most of your savings into a savings account, you may well find that your net worth is decreasing year after year, rather than increasing.
Want to know why?? Read on…..
Interest rates – and therefore cash savings rates – have been at near record-lows for more than a decade. And during that period, the increasing cost of day-to-day living (inflation) has risen faster, in percentage terms, than the savings rates offered by banks and building societies.
What this actually means is that because prices are growing faster than your savings, the money you have stashed away in your savings account gradually becomes worth less and less over time. The $10,000 you put away in 2010 will actually purchase less for you in 2020.
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Money in your savings account should be for emergencies and day to day spending. If your “savings” are also held in the same account, that is accessible through your ATM card, you may as well say goodbye to your plan for wealth attainment.
The saving/current accounts provided by the banks are not meant for long term saving. It is a bad idea to put your investments in there. The savings accounts are for short-term cash flow – for managing your next 1-2 months of expenses and for minor emergencies. It is easy to take money out of it and rotate. This money isn’t earning a lot of interest, but will cover you for living expenses and minor emergencies. It is not designed to save money to create financial independence.
If you want to ensure that the value of your money tomorrow beats the cost of holding your money, you have to manage your money in a deliberate and active way. This means creating an investment portfolio with a diversity of instruments such as mutual funds, equities and index funds to optimise returns.
You definitely should keep a portion of your money in a savings account. This would include an emergency fund with about 6 months’ worth of expenses set aside. The money that you set aside for saving and investment should be in a separate fund, that you do not have easy access to, as a significant portion of fund growth comes from compound interest.
Most banks charge annual fees for having a savings account with them. It’s possible that the fees for your savings account will be higher than the amount of interest you earn on your savings account. Further, there are hidden charges for many of the transactions done on the account. For instance, going below the required minimum balance may activate penalty fees. There may also be limits to the number of transactions you can make in a particular period. Due to the fact that savings accounts are safe, they are not as free, nor as flexible in enabling you to do what you want with your money, as you may be able to with a riskier investment. In other words: you may actually be paying the bank to hold your money.