You’re supposed to save money, right? It only makes sense to stick it into a savings account, but before you do, you might want to think again. Here are the 8 top disadvantages of a savings account. Consider these before you decide where to put your money. It could cost you if you don’t.
8 Top Disadvantages of a Savings Account
It’s true, you will want to put a little bit of money into a savings account. For example, if you have an emergency fund, which you should have, a savings account isn’t a bad place for it because you need easy access to it in case of…well an emergency.
Beyond that, however, a savings account is a terrible place to keep your extra cash.
Here are the main reasons for that:
1. Interest Rates Suck
One of the main reasons that savings accounts aren’t a good place to keep your money is interest rates.
While most banks will tell you that they pay interest on a savings account that is barely true.
They aren’t lying, but the interest rate is so low, that even if you have a few thousand dollars in the account, you might only see a few dollars of interest per year.
The average interest rate on savings accounts across the United States in 2019 was about 0.84 percent. That’s less than 1 percent.
So, depending on how your bank compounds their interest rate, that might only be $8.40 in interest on $1,000 dollars for a full year.
Even a CD or Certificate of Deposit has higher interest rates than that. They aren’t great, but you might get 1 ½ percent to 2 percent.
Of course, that means your money will be tied up for 3 to 24 months. The upside is the longer the term of the CD the higher the interest rate.
The point is, you can receive a better interest rate on your money almost anywhere from CDs to stocks and bonds.
Also, keep in mind the handy rule of 72. If you divide 72 by the interest rate you are receiving it will tell you how many years it takes to double your money.
For example, let’s say I have $5000 to save or invest. If I receive an interest rate of 1 percent, it will take 72 years for that $5,000 to become $10,000 dollars.
On the other hand, if I was receiving a 5 percent interest rate, my $5,000 dollars would become $10,000 dollars in 14.4 years.
(72/5 = 14.4 years)
That’s quite a bit of difference.
If you are receiving the national average interest rate of 0.84 percent, it would take 85.7 years for your $5,000 to turn into $10,000 dollars. Yikes!
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2. Banks Don’t Compound Interest Often
Not only does a savings account give you a terrible, almost non-existent interest rate, but they also don’t compound the interest often, and this makes a huge difference.
It will depend on where you have your savings account, but some banks only compound interest once a year while some do it quarterly.
The more often the better.
That’s because when the interest is compounded it gets added to the initial amount you put into the account.
That means the next time the interest is compounded it is done so on a larger amount and you will make more money.
For example, let’s say you have $1,000 dollars in your account and your interest is compounded annually.
Your interest rate is 5 percent.
That means for the year you would have earned $50 in interest.
Now that $50 is added to your initial $1,000 dollars, so the next year, you would receive interest on $1,050 dollars.
This means you would receive $52.50 in interest without having to add any more of your own money and your balance grows.
This is the magic of compound interest.
So, if your bank compounds interest 4 times a year you will end up making more money from your initial investment.
The problem is most savings accounts don’t compound interest as often as other investment types, so you end up losing a lot of money over the long run.
3. You Might Be Charged Fees
Okay, now this is really adding insult to injury.
Not only is your saving account going to pay you almost no interest and not be compounded often, but they may also actually charge you fees.
Some banks will charge you a monthly fee to have a savings account with them.
That’s just terrible.
So, that fee will eat up a good part of whatever tiny interest they pay you.
You might even go in the hole.
That means you could end the year with less money in your savings account than you started at the beginning of the year even if you don’t take any of it out.
4. The Big I…Inflation
If the interest rate you are receiving on your savings account is less than the inflation rate, over time, your money becomes worth less.
That means, all the hard work you did to make money to put into a savings account is not paying off for you.
The $5,000 or $10,000 dollars you put into the account today could be worth less in 5 or 10 or 15 years.
The buying power of that money will decrease as inflation goes up.
So, for example, if you have $10,000 dollars in a savings account today, in 15 years it might only be worth $9,000 dollars when it comes to buying power.
You’ve actually lost money even though it is still sitting in your savings account.
That’s why you need to make sure your interest rate is high enough to offset inflation, so you don’t lose money.
5. There Can Be Account Minimums
Some banks will require you to have a minimum amount of money in your savings account.
This is often $2,500 dollars.
So what happens if you go under that amount?
You could be charged a fee.
If it stays under the minimum for too long, they might close the account.
This isn’t a huge issue if you plan to put money into a savings account and leave it there.
But if you have an emergency and have to take some out, it could cost you.
Try to find a bank that doesn’t have an account minimum for their savings account.
That way you can have an emergency fund and not have to worry about taking money out of the account if your car breaks down or your water heater gives out on you.
6. Don’t Forget the Withdrawal Limits
There is a federal law called Regulation D that states you can only withdrawal or transfer money from your savings account a maximum of six times per month.
If you have a bunch of emergencies one month this could be an issue.
Most of the time, it is unlikely that you would make more than six withdrawals in a one-month time span, but it is something to keep in the back of your mind.
7. You Might Go Crazy and Spend All Of It
Saving money is hard. There’s no getting around it.
If you’re anything like me, when you see the newest shiny object you’re tempted to buy it.
You might be able to talk yourself out of it, or you might give in.
If all your money is in a savings account, it is way too easy to get to it and spend it.
Do this too many times, and you have nothing left for the future.
Besides your emergency fund, you want to have your money in an investment that is a bit less liquid and more difficult to access.
That way, when you are tempted, you won’t want to go through the hassle of getting access to the money. You will have talked yourself out of buying that expensive item and in the long run, you’ll be a lot happier.
8. Watch Out For the Insurance Limits
This isn’t an issue most of us have, but while banks do insure your money, they only do so to a point.
Currently, your money is insured up to $250,000 dollars. That’s more than most of us have in the bank, so it isn’t a problem.
However, if you have saved and worked really hard or got lucky in Vegas to have more than $250,000 dollars in your savings account, any money over that amount would not be insured.
So, as you can see, there are a lot of savings account disadvantages.
To Sum it All Up:
There are a lot of disadvantages to a savings account. Some of the big ones include low-interest rates, being charged fees, and the requirement of a minimum balance. While savings accounts are a good place for an emergency fund, any additional money you have should go into an investment that offers more bang for your buck.