Investment Tips: When Not to Use a Savings Account

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Most of us have had a savings account since we were very young. We probably got one before the age of ten, and whenever we got money for our birthdays, holidays, or what have you, we’d throw it in there. This way we had some money to help pay for a car and college when those things came around. After graduation, we figured it was probably a good idea to keep some savings, and still throw money into our savings accounts on a regular basis. Having a decent amount of savings is definitely a good thing, but a lot of people use their savings account for things that they really shouldn’t.

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You should never use a savings account for long term investing. If you plan on leaving that money alone for five or ten years, a savings account is a horrible place to put that money. Over a long period of time, mutual funds can easily earn rates of return from 12-15%. The best you’ll get on your savings account is around 5%. You don’t want to put money that you need on a short-term basis in mutual funds, because they can be very volatile, however over a long period of time, they’ll almost always beat using a savings account. If the money in your savings account is for retirement, your children’s college, or some purchase that’s going to be made at least 5 years away, you should really move that money into an investment with a bit more risk, such as quality real-estate and decent mutual funds.

There’s another situation when it’s inappropriate for you to have money in a savings account. If you just have a pile of cash sitting in savings with no purpose, there’s a problem. You need to be setting financial goals (ie, I want to reduce this much debt, save this much money for a new car, put this much into retirement, etc.) If you have money that’s just sitting in your savings account with no purpose, it’s not really doing all that much good there. Your money needs intensity and a direction. You can have all the money in your savings account in the world, but if you don’t have any use for it, there’s not much good of it being there. If you’ve got extra money just sitting around in a savings, decide what the best way to use it would be, and go do it. If your car is almost dead, make an upgrade. Set some aside for emergencies, put some away for retirement.

A lot of Americans don’t have nearly enough in savings, but there’s a percentage of the population who keeps on throwing money into savings, and chances are that money should be placed elsewhere. Don’t do any long term investing in a savings account, and make sure that the money in your savings account is there for a reason.

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