Just because you can’t lose money doesn’t mean there’s no risk in keeping your savings here.
- Savings accounts protect your money, but you’ll still lose purchasing power if you keep all your money here.
- Thinking about when and how you plan to spend your money can help you decide where to store it.
With record inflation and stock market volatility, it can be difficult to know what to do with your money right now. Those who have a little extra money on hand will probably want to keep it safe until they are ready to spend it. But sometimes, what seems like a safe bet can cost you in the long run. If your goal is to increase your wealth, here’s one thing you definitely don’t want to do with your savings.
Losing your money is not the only thing you should be afraid of
Locking your money in a savings account will ensure that you do not lose it, as long as you keep your account information secure and stay below the FDIC’s insurance limit. And you’ll probably get a small profit as most savings accounts allow you to earn interest on your balance. But some accounts offer much more interest than others.
Traditional savings accounts typically have annual percentage yields (APY) equal to or less than the national average of 0.06%. If you put $ 10,000 in a savings account with an APY of 0.06%, you would only earn $ 6 over the course of the year.
Meanwhile, inflation is rising rapidly. In the last 12 months, costs have increased by 8.3%. This means that the $ 10,000 you put into your account today has the same purchasing power as $ 9,237 a year ago. And while we all expect the inflation rate to slow down, it won’t go away completely.
You may not be able to lose money with a savings account, but the $ 6 you earn in interest over a year will not offset the purchasing power you are losing from inflation. That doesn’t mean there’s no room for a savings account in your financial plan. But you need to use yours strategically.
So what else should you do with your money?
A savings account is the best place to save your emergency fund and the money you plan to use for years to come. But instead of using a physical savings account, you should look for a high-performing savings account.
These accounts are exactly the same as a traditional savings account, except that they are offered through online banks and have higher APY. Some of the best high-yield savings accounts now offer APY up to 0.75%. And chances are they could climb even higher. Prior to the pandemic, some savings accounts had close to 2% APY.
A 0.75% APY will help you grow your wealth faster. That $ 10,000 balance from our previous example would be worth $ 10,075 after a year, about $ 69 more than you would get with a typical savings account. And over time, that difference will only increase because it will start earning interest on the previous year’s interest as well as the principal balance.
If you don’t expect to use your money for the next five years or so, you should consider investing. Investing carries the risk of losing, but it can also help you beat inflation. You can get a return of 10% or even more in a few years. And even if your investments fall, this is usually temporary. The stock market tends to go up in the long run, so as long as you don’t need to withdraw your money at an earlier time, the daily fluctuations in stock prices shouldn’t worry you too much.
What about your old physical savings account?
If you decide to sever ties with your old physical savings account, you can keep it as a backup or close your account and move your money to a high-performance savings account. Those who have set up automatic payment of invoices should make sure to update their account information so that late payments do not occur.
It may take a little work to move all your money, but it’s worth it. You will be able to earn more with your money this way, and this will help you to stretch your savings further in the future.
These savings accounts are insured by the FDIC and could earn you up to 12 times your bank
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