This message needs to be shared, I cannot fathom how much money is sitting in these useless accounts.
For decades, the cookie cutter financial advice was to save money. While this is obviously not wrong, there is so much more to financial success than just saving money! Let’s explore a handful of reasons that you do not need a regular savings account.
Your Interest Rate Is Garbage
Reason number one that regular savings accounts are pointless is that your interest rate is terrible. In most cases, as of the middle-end of 2021, you are probably getting somewhere between 0.01% – 0.05%. Sometimes less. Not only is this insultingly low, the banks offering you these rates are making tenfold that return (if not more) on your money while it sits there! The first thing that comes to mind here is how inflation is eating your buying power hundreds of times more than the rates these offer.
You might be thinking, where in the world should I keep my emergency fund if regular savings accounts are so useless?
Say hello to the HYSA (High Yield Savings Account). The rules are the same, you can only make 6 withdrawals per month from this account, but you get paid better interest!
This is not an exaggeration, my high yield savings account pays me 50 (that is not a typo) times more interest than a savings account at the bank where my checking account is held. Fifty. That is astronomical. I don’t even get a great rate (0.5%) due to the current low interest rate environment but that is absurd!
Of course, neither of these rates compete with inflation, but one is clearly better than the other.
In summary, HYSA’s are significantly better places to keep an emergency fund.
Working Funds Are Better Off in a Checking Account
The money that you need to get by, this includes bills, rent / mortgage, entertainment, etc. should simply live in your checking account. Set up auto pay for anything that you can, tie all of your credit cards to it, have your salary directly deposited to it, keep it simple and all in one place.
Regular savings accounts limit you to 6 withdrawals per month. Checking accounts do not have such a limit. Keep in mind that it is extremely important to be aware of any and all fees your bank may be charging you. Doing all of the above should allow you to sail smoothly.
A battle I am constantly fighting, and a question that may have come up for you here, is how much should I keep in my checking account?
The method I have found, this may come as a shock, is to use a spreadsheet. Tracking inflows and outflows by the date that they occur can help forecast the amount you need to keep in your checking account. The below video shows the method I use, check it out!
One thing to note, I like to keep a cushion (an extra few hundred dollars at least) in the event that my math is off. Most ACH transfers from your other accounts come in 1-3 business days, so having that extra bit to cover any overage (or sloppy math) is usually smart.
In summary, tying everything that you can to just your checking account makes life easier.
Those Dollars Are Better Off Working!
The first thing I always like to suggest is developing a sound emergency fund. As mentioned above, this is best in a HYSA. Once healthy, along with the checking account sitting in a good place, this money needs to work! Compounding is an extremely powerful tool, you want it working to your benefit!
Whether you have debt to pay down or want to build the taxable brokerage account, your dollars should do more than sit in a regular savings account collecting dust and losing value to inflation.
If you aren’t sure about whether you are ready to start investing, you can always reach out to a professional. I’ve also written this article about what you should ask yourself before you dive into investing!
The argument between paying down debt first or investing first is never ending. Personally, while I am fully aware that every situation is different, I like to think that removing all non-mortgage debt before funding a taxable brokerage account makes sense. Retirement account funding, particularly employer sponsored plans, should not necessarily take a back seat, but anything in excess of that can wait until that non-mortgage debt is paid off in my opinion.
My reasoning? While the equity markets do always go up when you zoom out (long term), paying off debt offers a guaranteed return; the interest rate you would pay if you didn’t pay the debt off. you can never guarantee an investment’s return, and if someone tries to you should run away as fast as you can.
In summary, your money is an extremely powerful tool and you should let it do it’s thing!
You are much better off with a high yield savings account than you are with a regular savings account. You won’t get rich off of either, but one is clearly better than the other. Additionally, you should maximize the efficiency of your checking account and work on keeping just the right amount of money in it. Lastly, refrain from losing too much purchasing power to inflation. Put your money to work, that is what your money would want!
Thank you so much for taking the time to read this. I always appreciate feedback, please don’t hesitate to reach out to me with any questions / comments / suggestions!