3 Ways a Savings Account Holds You Back Financially
Welp, it’s another article in which I challenge the status quo on a topic that seems universal. For some, the savings account can be one of their most prized possessions, a daily reminder of their “security in the world.”
First and foremost, if you live in America, most natives’ money issues are more on the spending side rather than the income side. America has a spending problem, not an income problem.
I’m a young millennial as well so there’s been plenty of times I look at my account in disgust wondering why I spent so much money on food and drinks.
The average American household holds around $300,000 in debt between a mortgage, car loans, Student loan debt, and credit cards.
$300,000 ?!
And that’s just the debt – The guaranteed monthly expense coming out of your pockets on a monthly basis. That’s not including any other spending.
Even if each couple makes $150k a year, they’re making just as much as they owe.
Not to mention the unemployment rate is extremely low, but 80% of Americans live paycheck to paycheck.
And for the individuals who have been able to build a nice savings account, it’s important to understand the difference between using a savings account as a “tool” and not as a “mentality.” Here’s how your savings account can be holding you back financially.
(I’m not your financial advisor, just an individual who likes to challenge ideologies).
1. You actually lose money with a savings account
People have heard individuals say “money in the bank is just sitting there,” but it’s doing something much worse than just sitting there collecting low interest and dust. There’s a thief that comes and steals some of your money while it sits there and this thief takes more than what your interest rate is.
That thief is known as inflation.
Putting on my “grumpy old man hat” I would say, “I remember when going to the movies was $7.”
Now movies can easily be $15 a ticket, especially if you want the IMAX or 3D version. Food is more expensive, gas is more expensive, homes are more expensive, everything is more expensive than it was in the past. That’s the result of inflation and if the inflation rate is around 1.5 -3%, but your bank is only offering you 1 or 2% interest, you’re either losing money, or breaking even — just for you to look at your money and feel “secure.”
Cash has a better responsibility which leads me to my next point.
2. Cash should be used for investment purposes, NOT to have as savings (primarily).
Don’t you wish you could just clone yourself? Literally put them to work and take home two incomes? Imagine if your clone was the absolute perfect version of yourself. They worked hard, never slept, and worked 24/7 making money for you. As an icing on top, they never complained and only did what you instructed them to do.
That’s your cash. It has two jobs:
Fund your life AND bring more hardworking money to you.
Money in a savings account doesn’t get invested at a favorable return.
3. Insurance and Assets protect you instead of draining your cash.
The #1 reason why people have a savings account is to protect themselves against an unexpected large expense. They want to feel “safe.” There’s nothing wrong with that, but insurance helps in that department. There’s many different types of insurance out there that you can use to protect yourself if something were to go wrong. You don’t have to empty your savings account just to invest, but insurance can relieve some funds that you can put to work immediately. If you have assets, there’s another source of rainy day funds. You would unfortunately have to sell or liquidate those assets such as stocks, businesses, and real estate, but that still is money that can be tapped into should you have a major unexpected emergency.
I think it’s safe to say that life isn’t catastrophe after catastrophe. You usually don’t get into a car accident on Monday, have your house burn down on Tuesday, get laid off on Wednesday, get divorced on Thursday, and lose a family member on Friday.
I’m not saying people don’t go through challenges of those extremes, but they usually are spread out in timing (Fortunately, but unfortunately). Savings can be put to work in the meantime. (Fortunately, but unfortunately).
Insurance is the “just in case” fund for when those unexpected events occur.
All that to say…..
I’m not saying having a savings account is wrong, but not at the expense of investing money as well. It’s one thing to not have a savings account, that I understand. I’ve been there.
It’s another thing to not have a savings account, no investments, and no insurance. You’re just welcoming a financial wipe out.
Keep expenses low, leverage insurance to protect you, and allow the cash you’ve earned work harder for you than you can work for yourself.