Savings Account vs. Investing

I think many people at some point contempt whether they might be better off putting their money into a savings account versus investing that money. First, for our purposes we will assume that we would be using an FDIC insured high yield account savings account. A Google search result of those types of accounts can be found here. The reason why we are assuming this is because those are the savings accounts would likely give other investment options the best challenge. Additionally, if you are currently earning less then 3% a year at your local bank, you should likely consider other options available in the marketplace.

Recently, we have experienced a lot of market volatility. I had one of my close personal friends, who is not in the financial industry, comment that it’s been a terrible year, as his index based investments are off about 5 percent from when he bought in. This is distressing for a lot of people as no one is happy with losing money. Given this psychological disposition it sometimes seems like a prudent decision to place your long-term money into a savings account.

For the long-term investor who has designated this money for retirement is almost never a good decision to place this money into a savings account. It is true that the money will likely experience less volatility, but over a long time frame it will seriously impact the amount of principal you have. A quick and dirty example is let us assume a person has $10,000 to invest with a 30 year time frame. Further, let us assume that the person can likely earn an 8.5% return by investing in a basket of index funds and earn 5.1% in a high yield savings account. At the end of those 30 years the person who invested in the basket of index funds will have $115,583 in the bank; while the person who put the money in a savings account would only have $44,471 available. That is a substantial difference.

For the short-term investor or an investor who is looking for income and not concerned with the growth of principal the savings account is a viable choice. There are a number of savings accounts which yield more then some bonds and bond funds. However, it is important to note that these accounts often times move with the interest rate market and if the Federal Reserve decided to cut interest rates (which seems like a possibility in the future) this could reduce the interest on the account and likewise reduce the amount of income a person would receive from the account. The savings account also makes sense for someone who will need money in the very near future and cannot risk take a loss right before the money is needed.

An individual should review their circumstances and financial goals. In some cases putting money into a savings account is a bad choice while in others it can be the perfect fit. As always, please consult with an investment and tax professional before making any financial decisions.