Is it Ok to Keep Money in Savings Account for the Long-term?
If you’re wondering, is it ok to keep money in savings account? Would stashing cash in savings be a good idea over a period of time? There’re a bunch of opinions out there that debate for or against this move. I wish I could give a simple answer to this but this decision rests entirely on your personal situation and goals. On the other hand, in the general sense, cash loses its value over time due to inflation – devaluing its purchasing power year-on-year.
The Value of Your Hard Earned Money
Your income is the value by which your employer or market views your worth. This is so because you’re usually paid a worthwhile wage depending on the inability to find your replacement. So, is it ok to keep money in savings account after getting paid?
This is certainly not a smart way to hold your valuable contribution to the world economy. But wait, your truest financial strength comes from money you’ve saved out of your formal wages – and how well it’s working for you to make more money – outside a standard savings account after covering all your living expenses.
A big salary package is admirable, and how you use it to fuel the lifestyle you love, may leave little left for onward investing. Keeping up with the Jones’s is merely a show of ignorance of the value of money.
The Opportunity Cost with Compound Interest
Now, when you practice the art of living within your means, the regular act becomes a habit. You will build both wealth, as well as the mental model required to maintain and keep that wealth.
While money remains unused, it is losing its value. If you’re still asking, is it ok to keep money in savings account at any time? Not only does money become worthless if left in a brass box for 100 years; you’ll miss out on the free compounding opportunity of money in an investment.
Cash grows by the power of compounding when interests and returns are added to the principal. When this system remains uninterrupted, the money expands over time. Coupled with regular monthly deposits – using DCA, the additional capital will produce quantum wealth for you in your lifetime.
As money compounds in interest bearing investments, is it ok to keep money in savings account also? Certainly. Your cash equivalents will be a liquid diversification for your main investments. Your dividends from stocks are a great example if they are placed on a Dividend Reinvestment Program (DRiP). This allows you to buy more of the same stock with new cash that pours into your brokerage account.
The Emergency Safety Net Cash Pool
Unused cash in a savings account may also not be a bad idea if you’re building an emergency stash. In the event of a personal financial struggle, your access to funds could spell the difference between life and death.
A typical emergency fund should store about 3 to 6 months of living expenses. Is it ok to keep money in savings account of up to 12 months of after-tax paycheck? You might ask; generally, the larger the dependents on your household, the more you should sock away into high-yield savings accounts.
Without this provision in place, you’d have to result to borrowing money. Your debt burden should not balloon to the point of hopelessness. You want to earn interest on money – not pay someone else interest on money you owe them.
The Greatest Investors Hold Cash
Cash is not a good place to be in if you’re a shrewd investor like Warren Buffett. On the other hand, the Oracle of Omaha frequently keeps cash pile for bottom fishing opportunities and vulture investing.
So, is it ok to keep money in savings account to wait for investment opportunities? Yes, if you know what you’re doing of course. This is because sometimes stocks trade above their intrinsic inherent value. Intelligent investors who see stocks are businesses are quick to exit an overpriced financial asset.
Cash is used to buy undervalued stocks or general market dips. This strategy has worked for many value investors like Buffett, Munger, Graham and a whole list of investing legends over the past several decades. So this is why sometimes it is ok to keep money in savings accounts.
Cash is King any Day
You know what they say, ‘Cash is King’! This saying applies to those who have an inherent strategy of seeking investing opportunities do deploy this cash.
But for beginners who’re starting out, it’s a bad idea to hold cash if the same could be placed in a money market fund to collect interest. Therefore, is it ok to keep money in savings account for this purpose? Certainly! And you do not even need to keep cash in T-Bills or CDs forever.
You’ll eventually find opportunities in equities such as stocks; that will produce higher yields and returns to grow your wealth.
So it’s a good idea if you know how to use cash or cash equivalents as a component in your money management agenda. Understand the time value of money also. Money is either losing value if left stagnant or growing through compound interest.
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A Few Parting Words
The decision to hold part of your investments in cash is a brilliant one. Your emergency fund should be light and agile enough to deploy cash when you need it the most. Investment accounts on the other hand, should have cash for strategic acquisitions use.
Finally, is it ok to keep money in savings account for more than one year? In the short-term, cash is safe in a standard savings or high-yield savings account. But move all or part into a money market investment if you need medium-term liquidity.
Lastly, cash that is sitting for years does not make sense or money. In the event of not knowing what to do with your free cash, seek a financial advisor or trust your funds to a Robo Advisor in the mean time.
Frequently Asked Questions (FAQs)
Is it bad to have a lot of money in a savings account?
The harsh truth! If you keep more of your cash in a savings account above and beyond basic liquidity to cover financial emergencies, you’ll lose money through inflation.
Is it smart to leave money in a savings account?
Keeping a significant chunk of your money in a savings account will hurt its ability to grow. So place it in equity opportunities for compounding – such as ETFs, Stocks, etc.
What is a disadvantage of putting money in a savings account?
Savings accounts are great for short-term storage of money you’ll need immediately. However, a clear disadvantage is the low interest rates that cannot compete with the awesome returns of their money market counterparts, such as Certificates of Deposits (CDs) and Treasury Bills (T-Bills).
How much money should I keep in my savings account?
A savings account can be a very useful short-term resource in the event of a personal or family emergency. A good sum would be about three to nine months of your after-tax paycheck for weathering unexpected financial storms in the future.
I wish you the best of luck in putting your savings and free cash to good use. Please share in the comments below, your personal ideas about using cash – which I may have missed in this article.
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