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A big savings account balance isn’t a good thing for two key reasons.
Key points
- I have several different savings accounts open to help me accomplish financial goals.
- I don’t keep more money in savings than what’s necessary.
- I prefer to invest in assets that provide higher returns than a savings account would.
I have several different savings accounts that I use to put money aside for specific financial goals. For example, I use these accounts to save for emergencies or to save money to pay for vacations and home improvements in cash.
But I am very careful with how much money I invest in these savings accounts and I make sure not to put in more than is necessary to accomplish the short-term financial goals I’ve set for myself. Here’s why.
Savings accounts don’t provide a very good ROI
One big reason why I don’t invest more than necessary in savings accounts is because even high-yield accounts pay a pretty small amount of interest.
It’s rare these days to find an account that offers an annual percentage yield of even 1%. That means the interest you earn on those funds is negligible even if you have a large amount of money saved.
It’s possible to earn a much higher rate of return with other investments that are relatively safe, such as an exchange-traded fund that tracks the performance of the S&P 500. That’s a financial index made up of 500 very large U.S. companies that has, over many decades, produced average annual returns of around 10%.
I know that I need to accept a lower ROI by putting some money into savings accounts because there are times when it doesn’t make sense to invest. If I’ll need the money within a year or two, for example, I don’t want to put it in the stock market because there’s a chance there will be a downturn right when I need the cash. In this case, I might be forced to sell at a loss if I hadn’t had much time to make a profit and don’t have time to wait out the downturn.
But I don’t want to limit my returns on investment any more than is necessary. So, I’ve figured out how much to save for emergencies, since I need to be able to access that money immediately if something goes wrong — without worrying about my investments …….