Updated October 5, 2022

Why Your Savings Account Won’t Help You Get Rich

Where do you save your money?

If you’re like most people, you’d probably say something along the lines of: “In a savings account. Where else?”

That may sound like the most logical answer. But just because it’s the logical answer doesn’t mean that it’s the best answer. In fact, depending on your savings goals, your savings account may actually be causing you to lose money over time. The truth is, whether you should save in a savings account or through a different means will all depend on what you are saving for. 

Below, we take a look at just why savings accounts can be such bad vehicles for saving money and growing wealth. We also offer some insights that you can use to determine whether you should be saving in a savings account or perhaps an alternative—such as an investment account.

The Problem With Savings Accounts

People tend to think of a savings account as a safe place to park their money. After all, the savings accounts are FDIC-insured up to $250,000, meaning there’s virtually a 0% chance that you’d ever lose your principal. When you save money in a savings account, you know that it will be there when you eventually return to withdraw it.

The problem? The money you withdraw will likely be less powerful than the money that you put in. It won’t buy as much and it won’t go as far, and that’s all thanks to inflation.

Inflation is a measure of how much the prices of consumer goods increase over time. According to the US Federal Reserve, the long-term inflation rate has averaged approximately 3.2% since data began being collected. (Of course, some years might experience lower levels of inflation, and some years, like 2022, might experience significantly higher levels of inflation.)

The problem is that savings accounts in the US do not offer interest rates anywhere close to this long-term inflation rate, let alone the even higher inflation rates we’ve experienced so far in 2022. 

How bad of a disconnect is there? According to Bankrate, as of September 2022 the typical savings account in the US currently offers an interest rate of just 0.13% APR. That’s less than 1/25th the long-term inflation rate, and less than 1/65th the 2022 inflation rate of 8.5% (as of July 2022).

In other words, when you save money in an account that doesn’t at least match the rate of inflation, you may not lose actual dollars. But the dollars that you have are almost definitely losing purchasing power over time—and that’s not the kind of equation you want to follow if you are looking to build long-term wealth.

So, where should you be saving money?

As with so much else in the world of personal finance, the answer to this question is: It depends. 

If You’re Saving for Emergencies and Short-term Goals…

While a savings account may not beat inflation, it still serves a purpose: Ensuring that money you put aside is there when you need it. This makes savings accounts an excellent way of saving for emergencies and any short-term goals where you need to be sure that your money is safe. 

That being said, it pays to shop around. Below are a few options that you may want to consider to get the biggest bang for your buck when it comes to your savings.

High-Yield Savings Accounts

While savings accounts offered by many of the largest and most well-known banks tend to pay low interest rates, there are a number of banks that offer much higher yields. This is especially true of online-only banks, which have lower operating costs and can therefore share a greater percentage of their earnings with their customers. 

As of September 2022, it’s possible to find high-yield savings accounts offering yields in excess of 2% - 2.5%. That may still be a far cry from the current rate of inflation, but it’s a much better deal than the near 0% rates offered elsewhere. 

Money Market Accounts

Money market accounts can be thought of as a combination between a savings account and checking account. Like savings accounts, money market accounts earn interest on money held in them; but like checking accounts, they come with debit cards and check writing privileges. Money market accounts are FDIC-insured, just like checking accounts and savings accounts.

While money market accounts have traditionally earned higher interest rates than standard savings accounts, in recent years they have actually tended to be quite similar. In 2022, the average money market account offers an interest rate of just 0.09%

That being said, it’s possible to find high-yield money market accounts just like you can find high-yield savings accounts. As always, you should shop around for the best rates.

Bear in mind that many banks require high minimum balances to open a money market account or to avoid account maintenance fees. This means money market accounts may not be well-suited to your needs, especially if you are just getting started saving. 

Short-Term CDs

A certificate of deposit (CD) is another kind of bank product that you can use to save money. 

They are essentially a contract between you and a bank, where you agree to lock away a certain amount of money for a period of time in exchange for an interest rate which is typically higher than what is available from a standard savings account. 

How long do you have to lock your money away? That depends on the term of your CD. Terms are commonly available in 1-month, 3-months, 1-year, and 5-years, though others are sometimes available as well. Generally speaking, the longer you agree to lock your money away, the higher your interest rates will typically be. 

As of September 2022, the average 3-month CD offers an interest rate of 0.13%, which, while low, is still higher than what you would typically earn from a savings account. The average 1-year CD, by comparison, offers an interest rate of 0.76%. As with high-yield savings accounts, it is possible to find banks offering higher yield.

The downside is that, if you need to access your money ahead of schedule, you will pay a penalty. This penalty is usually in the form of forfeited interest, which would cut down on your total returns. With this in mind, short-term CDs may not be well-suited for your emergency fund, since you never know when an emergency might strike. They can, however, be a good option for other short-term savings when you know exactly when you will need the money. 

If You’re Saving for Long-term Goals…

For longer-term goals, you’re most likely going to be better off investing your money instead of saving it in a savings account. This will give it the opportunity to grow, and hopefully outpace inflation over time

What do we mean when we say “long-term goals”? While it’s somewhat subjective, it includes ultra-long-term goals like saving for retirement. But it also includes medium-term goals like buying a car, saving for your child’s education, starting a business, and everything in between. As a rule of thumb, if you have at least three years before you need your money, investing is probably the way to go. 

To illustrate the difference between investing and saving when it comes to yield, consider the fact that between 1928 and 2021, the S&P 500—a popular stock market index—has returned an average of nearly 12% each year. After the long-term inflation rate of 3.2% is factored in, that’s a long-term real return of more than 8%.

Does this mean that you should invest entirely in stocks? Probably not. A diversified portfolio consisting of stocks, bonds, real estate, commodities, and other asset classes will prove ideal for most investors, as it provides an opportunity for growth while also controlling for risk. 

How much should you save?

Again, the answer here is that it depends. 

That being said, as a general rule of thumb, most financial experts recommend that you have between three and six months’ worth of expenses set aside in an emergency fund. For most people, this should be enough to see you through the most common surprise expenses that life tends to throw at us, including a moderate period of unemployment. 

Of course, this is a nuanced statement, and some people should ideally have more saved. Those working in a volatile industry or at a struggling company, for example, might want to save more by building an emergency fund with six to twelve months’ worth of expenses. The same might be true for those who are an entrepreneur, freelancer, or who otherwise have inconsistent pay. 

Add to this any short-term savings goals that you might be planning for—money that you’ll need within a year.

For most people, anything beyond that is probably overkill. Instead of saving any excess in a savings account, you’d probably be better off putting the extra money to work in the market where it can grow.

Investing for Optimal Growth

If you’re new to investing, that’s great! Investing is one of the most powerful tools when it comes to building long-term wealth. Paired with an appropriate savings strategy, investing forms the bedrock of most financial plans.

Of course, if you’re new to investing it can be difficult to know where to start. With this in mind, here are a few quick tips to help you get started:

Here at Allio, we understand how difficult it can be to take that first step and transition from saver to investor. That’s why we make it as easy as possible for our users to start investing.

Our portfolios are diversified across stocks and bonds, as well as lesser-known asset classes like commodities, real estate, precious metals, and cryptocurrency. Set up a recurring investment to invest consistently according to the schedule that works for you. And do all of this knowing that we’re committed to keeping our fees as low as possible.

Interested in learning more? to be notified as we get closer to launch, and receive helpful content in your inbox.