Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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You’ve probably been told to save your money before. It is a pretty common thing to hear growing up or in school, or even on the news.
But is saving money always the best decision? There’s got to be a down side right?
It turns out that there are some disadvantages to saving. But before we get into those, we need to know what we mean by “saving”.
What is Saving?
There are three things we do with money. We bring money in, we send money out and we hold on to it.
Saving falls under the hold onto our money category.
To put it simply, saving is anytime we put money aside ensure we have it at a later time.
The most common way to save is to put money into a savings account.
What Are the Disadvantages to Saving?
We get told all the time to save money, but what are the reasons we shouldn’t?
1 Low Interest Rate
Savings accounts have a notoriously low interest pay out. Some banks pay savings accounts as little as 0.01% per year. That means if you have $100 you will get 1 penny every year! That is basically nothing.
Higher end savings accounts called high yield savings accounts are a bit better than that. These accounts change rates depending on the current rates available to banks from the FED (that is the central bank of the US).
For example, 0.5% is a common rate now, but just a couple years ago they were as high as 2%. It just depends on the current rate.
But, as far as interest on money saved, you still get basically nothing.
2 You Lose to Inflation
Not only is the money you get paid back low, but you also get hit by the second punch of inflation.
Inflation is money losing value over time usually due to more money being put into circulation.
On average we see about 2-3% inflation every year. So if your money isn’t making more than 3% in interest you aren’t actually making any money.
That 2-3% isn’t locked in either, so that number could become much higher.
If you are only a saver you are losing money in the long run.
3 Hard to Balance Saving and Necessary Spending
If you get into the saving mindset it can be really easy to stop spending money on things that matter to you.
For example, some people take cutting food spending to the extreme. But if you aren’t getting the calories or nutrients you need then you put your health at risk.
Or you might not get a necessary doctor’s check up to save another buck. Not spending on these things can be detrimental to your health long term.
On top of that, saving should not trump spending on things that really matter to you, like going to see family or spending on your favorite hobby. These things are important to your mental health.
So being too stuck on saving can be a huge disadvantage to your physical and mental health if you’re not careful.
What is the Importance of Saving Money in a Bank?
Now that I’ve told you why saving can be bad, I do want to say that having money saved in a bank is a good idea. It just needs to have a specific purpose.
1 Having an Emergency Fund
When life happens and you need some extra money it is important to have an emergency fund on hand.
This fund needs to be “liquid”. Liquidity is the way to refer to money that can be accessed easily.
Think of it this way. You need water to survive. If you have a glass of water you can easily drink that water. If you have a large hunk of ice then you have to wait for it to melt before you can drink it.
Money is the same way, you need to have money that is liquid to use when you need it. That takes the form on cash, money in a savings account, and easily accessible capital.
This is important so you don’t have to sell assets you have (like stock or real estate) to get at your money, or so you don’t go into debt.
Keeping money on hand in a savings account protects you from both of these.
2 Saving Upfront to Avoid Interest Fees
It can be incredibly tempting to buy things upfront for low money down and easy monthly payments. I’ve fallen for it a couple of times.
The problem is that the amount you pay in interest is usually absurd.
For example, I recently bought a shed for a tiny house project. If I followed the “no money down” advertisement and paid off the shed over four years like they recommend I would end up paying twice as much as the shed is worth.
Instead, save up money in your account and then buy once you have enough. You’ll find that not having monthly payments is a great relief and by the time you’ve saved up for something you might not want it anymore anyway!
Either way you save money in the short term and long term.
3 Feeling of Security
As I mentioned before, not having monthly payments is a great relief, and having cash on hand for an emergency is extremely useful when life happens. Both of these together give you financial peace of mind.
Not being obligated to shell out money every month and having the money to cover expenses as they come up is the perfect recipe for feeling financially secure.
Let’s look at two scenarios. Let’s say you’ve got two car payments, a mortgage, payments on three credit cards, a financed TV, and payments on a all terrain vehicle (because why not). You have nothing in the bank but you make good money.
You get called into your bosses office one day and you are informed that your company has gone bankrupt. Everyone is being let go without severance pay.
What do you do? That’s right, you start crying because you don’t know what you are going to do.
You’ll probably lose most of the things you have financed, you’re credit with be sunk, and you will be scrambling to find a job. Any job! That is a feeling that nobody should ever have to deal with.
Now let’s say you have a mortgage, but you paid for some reliable used cars in cash, you bought your TV outright, you’ve been smart with your money and have no credit card debt, and you are saving up for that ATV.
Because you’ve been saving up for the ATV you have 6 months worth of expenses in your bank account.
Your boss calls you in and tells you that the company has gone underwater and you’re being let go.
While this is a very tough spot to be in, you can go home with the peace of mind that you have six months to figure out what the best next step is. You start to strategically look for the best job to fit your needs, and you won’t settle for less.
That is a financially secure position. And that is what peace of mind looks like.
Invest Your Extra Money Instead
One of the big disadvantages of saving money is that you lose to inflation because you have such a piddly interest rate.
To overcome this disadvantage, you should invest any extra money you can accumulate outside of your emergency fund. Investing wisely overcomes the disadvantages of saving money.
1 Beat Inflation
Investing can mean a lot of things to a lot of different people. Usually it sounds scary and confusing.
While it can be confusing, it only has to be as complicated as you want it to be.
The easiest way to invest is by putting your money in a low fee index fund and just letting it grow with the market.
It is very reasonable to expect a 6% return on investment from an index fund over the long term, so if inflation stays at 2-3% you are actually making real money every year!
That is the beauty of investing. If you are patient you can watch your money grow over the years and not lose to inflation.
2 Grow Long Term Wealth
Since putting money in a savings account loses you money year over year to inflation your savings aren’t making you wealthier. As soon as you stop putting money in you start losing your wealth very fast as you spend it.
Investing on the other hand has the potential to grow long term. As that 6% return compounds on itself it starts to snow ball until you don’t even have to worry about contributing money anymore.
Once you hit that point you become truly wealthy. It just takes time to get there, so stop spending every dime you have, save up and start investing!
Taking Saving Too Far
Really, it comes down to this. Saving is better than not saving in almost every instance. If you are spending every last dime you have then you are in a worse financial position than people that save.
However, saving can be taken too far. If you are only putting money into a bank account and not investing it, you are actually losing money long term.
But more important than that, if you refuse to spend money on things you need (like medical care) or things that matter (like your favorite hobby) then you’ll end up with a rather unhappy life.
By keeping your life balanced you will get all of the advantages of saving and not the disadvantages of saving money.
What is another disadvantage of saving money? Has saving money every come back to bite you? Tell me about it in the comments below.
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A list of definitions used on this blog can be found here.
High Yield Savings Accounts: A savings account that pays interest above the national average. Usually this is much closer to keeping up with inflation although it is a bit lower than that. While rates vary, around 1% is a high yield in 2020.
Inflation: Money losing value over time usually due to more money being put into circulation.
Emergency Fund: Money set aside to be used in emergencies only. When you use money from your emergency fund you will need to replenish it as soon as you can.
Liquidity: The way to refer to money that can be accessed easily. For example, having cash that you can pull out of a bank account is liquid money. But having equity in a home, that requires a sale or financing of some kind to access, is illiquid.
Assets: Things that put money into your pocket every month (or year). Sometimes equity in your house is also included as an asset, but I prefer not to include it. A car loses value every year (depreciates) so it is NOT an asset.
Invest: Giving an entity (or an individual) money whether in the form of stocks, bonds, or buying any other type of asset in hopes of getting more money back in the form of interest.
Index Fund: A way to invest in stocks that puts a little bit of your money into every company listed in that index or list of companies. For example, the index could invest in all companies in the S&P 500 or all publicly traded companies, etc.
Return on Investment: How much money you get back, usually measured yearly, on the money you invest in something. For example, if you invest $1,000 and receive $100 back from that in the course of a year then you’ve had a 10% return on investment.