Savings accounts are a secure and easily accessible option for holding your money. However, they come with limitations, including fees and restrictions, and offer minimal benefits. Expanding your financial knowledge and exploring different investment options can help you grow your wealth beyond just a savings account. So, according to financial advisors, here are 17 reasons why it’s wise not to keep all your savings in the bank.
Lack of Control Over Your Money
Banks usually impose cash withdrawal limits, restricting access to your funds when you need them in emergencies. As Small World reports, this is generally as low as £500 at an ATM or £2,500 directly from a bank. Either way, this really isn’t ideal, as your hard-earned cash is essentially being held hostage when times get tough.
The Illusion of Safety
The concept of safety in bank accounts can be misleading. While funds are protected against loss, they are not protected against inflation or purchasing power loss. The relative safety offered by bank accounts can be complemented with higher risk, higher reward investments.
Low Interest Rates
Banks often offer lower interest rates on their savings accounts than other investment options, leading to potentially lower returns on your savings over time. Experian recommends “CDs, money market accounts, high-yield checking accounts, and bonds” as alternatives to maximize your savings.
Fees and Charges
Some banks charge monthly maintenance fees, reducing the overall value of your savings. Additional charges like transaction and ATM fees can quickly accumulate, especially if you frequently access your funds.
Lack of Financial Education
A lack of financial education often causes Brits to rely solely on savings accounts. Doing so will cost them money in the long run, so they should educate themselves with online resources about their various investment options and diversify their portfolio.
Inflation Risk
Money in savings accounts can lose value over time due to inflation, which erodes the real value of savings. Investopedia warns, “Any time your savings don’t grow at the same rate as inflation, you will effectively lose money.” Inflation-protected assets are far better options for retirees seeking to avoid inflation losses.
Limited Liquidity Options
While money in savings accounts is liquid, it offers little financial growth or flexibility compared to other liquid assets like stocks and ETFs. You can leverage real estate investments for liquidity through refinancing or lines of credit, options not available through standard savings accounts.
Emotional Comfort vs. Rational Decision-Making
The perceived safety of banks can lead to emotional decision-making, making people keep their money in low-yield accounts out of fear rather than financial strategy. Diversification will let you reduce risk and potentially increase returns.
Missed Tax-Advantaged Investment Opportunities
Tax-advantaged accounts like ISAs offer benefits that your regular savings accounts can’t, such as deferred or tax-free growth. Investing in these accounts can significantly enhance your retirement savings through tax benefits and compound interest.
Limited Access to Investment Opportunities
Savings accounts offer limited growth potential. The investment opportunities available through the stock market, real estate, and bonds offer higher returns. Investopedia recommends diversification of investments as “the most important component of reaching long-range financial goals while minimizing risk.”
Impact of Bank Policies on Your Money
Bank policies and current account terms often change, affecting interest rates, fees, and access to your funds. Banks will act in their own best interest, lowering interest rates and increasing fees, so you should be responsive to these changes, which can be more challenging than managing direct investments.
Financial Market Ignorance
Investopedia defines financial markets as “any marketplace where securities trading occurs, including the stock market, bond market, forex market, and derivatives market.” Engaging with financial markets will leave you far more adaptable to economic changes, including recession and increases in unemployment, than if you were to leave all your money in the bank.
Opportunity Cost of Capital
Keeping all your money in savings accounts forgoes the potential for high investment yields. You should evaluate the opportunity cost of keeping your savings in the bank, as it could be stopping your long-term wealth accumulation.
The Risk of Banking Sector Instability
While banking crises are rare, they pose a serious risk to savings that exceed the insured amount. Diversifying your assets beyond the banking system is an essential safeguard against events like the 2008 recession.
The Digital Revolution and Fintech
The rise in the past two decades of financial technology, or fintech, has given people access to tools and investment opportunities like cryptocurrencies that traditional banks do not offer. The digital revolution in finance allows you to manage investments through online brokers and trade stocks with no fee charges.
Global Investment Opportunities
Keeping your savings in a local bank will limit your exposure to global investment opportunities that offer higher returns and diversification benefits. International stocks, bonds, and mutual funds will provide growth opportunities beyond the domestic market.
The Psychological Benefits of Active Financial Management
Taking a more active role in your financial management by diversifying your portfolio will increase your financial literacy and, by extension, your confidence. This new sense of personal empowerment will lead you to take more risks, exposing you to higher rewards.