18 Reasons You Shouldn’t Keep All Your Savings in the Bank

Savings accounts are a generally safe, liquid way to store your cash. However, they offer limited benefits and come with fees and restrictions. There are many ways to improve your financial education and diversify your portfolio beyond savings accounts. Here are 18 reasons why you shouldn’t keep all your savings in the bank.

Low Interest Rates

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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, 401(k)s, treasury bonds and I bonds” as alternatives to maximize your savings.

Fees and Charges

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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

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A lack of financial education often causes Americans 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

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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.” Treasury inflation-protected securities are a good option for retirees seeking to avoid inflation losses, and I bonds can be excellent for small investors.

Limited Liquidity Options

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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.

Over-Reliance on FDIC Insurance

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NerdWallet explains, “With FDIC insurance, your money held in a bank is protected by the federal government if your bank fails.” However, they only protect deposits up to $250,000 per depositor, which may not cover all your savings.

Emotional Comfort vs. Rational Decision-Making

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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

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Tax-advantaged accounts like IRAs and 401(k)s 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

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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

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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

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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 more adaptable to economic changes, including recession and increases in unemployment.

The Illusion of Safety

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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.

Opportunity Cost of Capital

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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.

Lack of Control Over Your Money

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Banks usually impose cash withdrawal limits, restricting access to your funds when you need them in emergencies. Forbes notes, “Your bank may allow you to withdraw $5,000, $10,000, or even $20,000 in cash per day.” Banks may also limit access to deposits during times of economic instability.

The Risk of Banking Sector Instability

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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

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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

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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

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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.

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