A savings account is a great thing. In fact it is something to take pride in as you show the world that, yes you, are in fact financially capable and solvent. Increasingly in our ever growing materialistic and consumerism fueled world, a large savings account and retirement savings in general become more and more rare. In fact, 6/10 Americans wouldn’t be able to cover an emergency expense of just $1,000 if it came up, according to a Bankrate survey. Also not to mention that an estimated 78% of U.S. workers live paycheck to paycheck, according to Forbes. All in all if you’re able to save money you are doing something right and should pat yourself on the back. However if you want to level up in the world of personal finance, one of the first things that needs to go is that large savings account.
“Do you mean I should spend it?” you might be asking. “Absolutely not!” I would reply, enthusiastically. I am not against savings accounts per say, but I do feel the excess accumulation of money in a savings account does a disservice to your financial health. In my opinion (and plenty of other financial professional’s opinion as well), there should only be 6 – 12 months of expenses in there. When you read about how much you should have “saved” for retirement, they are really talking about “how much you should have in retirement accounts/investments ready to go when you retire”.
Our reasoning for only keeping a small percentage of your net worth in savings accounts is simple. It’s because the return is hot garbage. For example most savings accounts yield less than 1% with some yielding in the 1.5 – 2% range, and these are “high yield checking accounts” that come with plenty of restrictions for withdrawing money. On the other hand buying an S&P 500 index fund or a R.E.I.T. could yield you returns in excess of 10% per year. It’s really simple math, a 10% return is much better than 1 or 2%, and you need to maximize your returns in order to retire early.
However an objection to keeping only 6 – 12 months of expenses in your saving account, is the issue of liquidity. But, my counter to that would be the fact that transferring money to and from a brokerage account, such as TD Ameritrade or E-Trade, is only 5 days at most. Is it instantly liquid like a bank account would be? No, not really, but 5 days isn’t a long time to wait to be honest. And if you’re trying to retire early, very and I mean very, few events will require over 6 months expenses. An example of one such expense would be buying a house, or a car, in full with cash.
In conclusion it is great to have savings, but having too much could be detrimental to your financial goals. The low savings rate of most people, means that people with high savings account balances are doing a lot of things right. However getting 1% on the lion’s share of your wealth is not a good idea. Instead investing that money will help you, hopefully, achieve a high return rate and in turn, generate more money in your accounts.
Disclaimer: I am not an investment or financial advisory professional. Also this should not be considered investment or financial advisory advice. All financial and investing advice should be made with research and the input of an investing or financial advisory professional.