Savings accounts? Are you crazy? Boo, hiss. These days, savings accounts are only used as joke fodder for late-night comedians. Take the mom who wants to teach her kids the value of prudent financial management, for example:
For little Bobby’s eighth birthday, his mother takes him down to the local credit union to open a savings account. Figuring that all the grownups in his life would pour money into this new savings account to encourage him — without his lifting a finger — Bobby reasons that the offer is hard to beat. So, off to the credit union they go.
At his mother’s prompting, Bobby explains to the banker that he came to open a savings account. The banker gives a knowing glance to the mother and pushes the application form across the desk to Bobby. “Well, sir, this is your account, so you have to fill it out.”
Bobby methodically makes his way through the form, but pauses when he comes to the box that reads: “Name Of Your Former Bank.”
After a minute, he grins as he writes … “Piggy.”
Ba-da-boom! [Cue the clash of cymbals.]
If you’re like millions, you might think that savings accounts have no more use than old-fashioned, lame jokes.
I used to stick my nose up at savings accounts too, until my late father-in-law told me he invested in nothing but an old-fashioned savings account. He was a wise man of few words; so when he spoke, everyone listened — including me. Until his death, he lived frugally — but comfortably — on those savings.
My father-in-law’s experience made me look at savings accounts with different eyes. Granted, he did this in the days when they paid interest rates with real numbers before the decimal point. That’s no longer the case, is it? These days the return you get on savings accounts barely moves the needle on the return scale. We often joke that banks use those accounts to challenge their IT people to see how many zeroes they can get into an interest rate, like 0.000001%.
Nevertheless, I still believe savings accounts are a viable part of a successful investment strategy.
Why in the world would anybody think that?
Well, first of all, there are the old standby arguments you always read when you do a search for something like “the advantages of savings accounts.”
The obvious advantages of savings accounts
With most investments, there is a time delay involved in getting access to your money. But sometimes you need quick access to your funds. Our furnace went out a short while ago, right before a really cold snap moved through. (In fact, it was only when I went to turn on the pilot light that I discovered it had given up the ghost after 30 years.) Thankfully, we had enough sitting in a savings account to take care of that problem immediately.
Everyone knows that (in most cases) the Federal Deposit Insurance Corporation (FDIC) guarantees up to $250,000 of your money in a savings account. Now, I know there is a cadre of people out there who believe the sky is about to cave in on us and that that guarantee is worthless; but for the rest of us, that guarantee makes a savings account as safe as anything you are going to get anywhere. And as Warren Buffet often remarks, “Rule #1 in investing is: Don’t lose it. Rule #2 is: See Rule #1.” For safety, it is hard to beat the savings account.
3. No hurdle to start
As Bobby’s story above illustrates, getting started with a savings account is both quick and easy. No minimums, no fuss, no conditions, no nothing — just “git ‘er done” and you’re in business.
The not-so-obvious advantages of savings accounts
Now, as Tom Selleck used to say in “Magnum, P.I.,” “I know what you’re thinking.” We’ve heard this a million times, and by now those arguments insult our intelligence because they downplay the abysmal returns quantitative easing is causing us to endure. You are just writing this to get another post out there, or who knows why. Wake us up when you have something real to say. How do I know that? Because I used to think that … until just under 10 years ago.
In a previous post, I related how my wife and I had a wake-up call late in life and we suddenly went into overdrive-catch-up mode determined to cobble together as much of a retirement fund as we could in short order. Like many people, I didn’t know where to begin when it came to investing. That’s when I discovered the first of the hidden advantages of a savings account.
4. You don’t need to know anything
On my other blogs, I often hear from readers who explain why they put off investing or (worse) have no plan to invest at all. Close to the top of their list of reasons is ignorance: They don’t know what to do or how to invest. I didn’t either, so I started by simply piling all our spare money into a savings account.
This is the age of the Internet and, if you want to learn, there are many places where you can learn how to invest, for free or for money. However, you don’t need to know anything to get started with a savings account. You can always reinvest what you have deposited there somewhere else, but it is almost impossible to get back what never got put in there in the first place.
5. You don’t need to take any risks
As pointed out above, a savings account is probably the safest starting point for any long-term investment strategy. It is the easiest thing in the world to move money out of a savings account into another investment vehicle when the opportunity presents itself. As an example, if the house next door becomes available and you want to buy it as a rental property, where do you put your funds as you scrape up the down payment? Your savings account would be a good start … if you were faithful and consistent to keep building it.
6. You buy time to learn
Ignorance is one of the biggest obstacles holding people back from being determined and consistent investors. Ignorance usually leads to this kind of statement: “If I don’t know what to do, I’m very afraid of losing my money.”
Well, if you start with a savings account, you buy yourself enough time to learn all you can about investing, until you are comfortable that you know what type of investing interests you, and then you can ease into that at your own pace — with the capital you have been saving all along!
7. Positive reinforcement
Nothing succeeds like success, they say. Instead of procrastinating out of fear and ignorance, when you start with your humble savings account, you see progress after a few months. Sure, it’s not a million dollars, but it is more than you started with.
Once we saw our savings account grow, it inspired us to see if we could do even better. It’s hard to put a value on this positive reinforcement, but for us it was invaluable. The biggest mistake people make is not following through with their investment plan. The instant feedback you get on your growing savings account can be a motivator to keep going, if that sort of things has meaning to you (as it did for us).
8. Reality is on your side
Reality? What reality? This reality: No matter what you invest in, for the first five to 10 years, the lion’s share of your nest egg consists of your own contributions.
As the chart to the left shows, it isn’t until your cumulative contributions begin to add up to “real money” that the returns or interest also begin to add up and create a material boost to that nest egg.
When you make the decision to get serious about investing, you can take some comfort in the fact that you don’t lose a lot by taking a year or two to learn all you can about investing while you simply stash cash in an old-fashioned savings account.
(In fact, you could think of that teeny, little bit of interest you lose as your school fees, which are cheap at the price, all things considered.)
But that doesn’t mean you should wait to open a savings account if you don’t already have one …
… because the biggest key to investing success, as many have pointed out, is simply to get started. And there is no easier and safer way to get started than to open a humble savings account. You don’t need to restrict your investing to savings accounts like my father-in-law; but as a starting point to a successful investing career, savings accounts are hard to beat.
Did you use a savings account to help you get started investing? What do you see as the advantages of savings accounts?
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