Ever since we were little, we were encouraged by parents or grandparents to save our money so that we could buy something that we wanted for a long time. And, even though the entire concept of savings is beneficial, actually being able to put aside money on a regular basis is more complicated.
Nowadays, there are numerous methods to help you save your cash for darker times and most financial institutions encourage you to do this. But to what point putting your money in a savings account is a profitable business and when should you stop or seek alternative investment possibilities? Read everything you need to know about this topic below.
How do savings accounts work?
A savings account allows you to deposit an amount of money on a regular basis (usually once a month) for a fixed time. At a due date, you will be able to withdraw all your money plus the interest received from the financial institution.
Unfortunately, keeping your money in a regular savings account is not a profitable business anymore due to the low-interest-rate that varies between 0.01% and 1%.
Internet-only banks are usually the ones that offer the highest interest rates, while physical banks won’t offer more than 0.5%. In other words, on 10.000 dollars worth of savings, you will receive anywhere between 1 and 100 dollars more on the due date.
At this rate, you will probably be able to purchase a washer and dryer set in ten years.
How to put more money in your savings account?
Saving money on a regular basis could prove difficult to impossible without a strict financial plan. You need to take into account a series of factors that could disturb your monthly savings. For instance, you should consider the stability of your employment for the next year before deciding to open a savings account.
Also think about your life standard, comfort, and how willing you are to spend money on luxury items. Write down on a piece of paper all your fixed expenses such as rent, utilities, insurance or groceries. Don’t forget to add another 10% of your monthly revenue for emergency situations. These expenses aside, you could think about how much money you have left and how much could go into your monthly savings account.
How much money should you keep?
As we previously mentioned, keeping your money in a savings account is not a profitable business anymore. However, it could be an excellent opportunity to determine you to become more financially responsible in the short run.
The ideal amount of money in a savings account is enough to cover up all your living expenses for six to nine months, up to one year. Enclosed here are also money required for paying rent, utilities, transportation, food or phone bills.
So what is the downside? Many financial institutions don’t allow you to withdraw your money whenever you want so placing all your savings in just one account is not smart. This is why it would be better to open a second account for emergency situations, an account that grants you full access 24/7.
The inflation rate is also a factor that might influence your decision of keeping your money in a savings account. Bear in mind that your deposit interest rate is calculated annually, so you will only receive 0.5-1% after one full year.
To find out the monthly interest rate, you need to divide the total interest rate to 12. Therefore, at an interest rate of merely 1% annually, you will receive 0.48% for a six-month deposit and 0,74% for a nine-month deposit.
The projected annual inflation rate in the United States in 2020 is 2,5%, meaning you will have to pay around 2,5% more on all the products and services you purchase while your salary remains the same. So, even at an annual interest rate of 1%, you will afford fewer things after you take your money out of the savings deposit.
The best way to make sure your money doesn’t lose its value is to reinvest it. Properties are a safe bet, but you could also go for bonds, treasury bills or notes.