No doubt you’ve heard, over and over again, how important it is to save for retirement, have an emergency fund, and budget-saving into your monthly financial plan. In fact, you’ve read about it right here on this blog. So, is it possible that there are actually some disadvantages to saving money?
In short: Yes. Just like anything else, you need to take a look at the pros and cons when making decisions.
The pros, of course, include creating some financial security for yourself, having money put aside in case of an emergency, and if you have a savings account, having your funds easily accessible. All great things. But what about the cons?
Tradeoffs of Putting Money in the Bank
Well, for starters, there can be disadvantages to putting your money in the bank. Having it too easily accessible through a debit card can make it too easy to spend. And banks are notorious for paying very little interest on your money, which by the way, they are borrowing to grow their own funds until you need them. Wouldn’t that money serve you better by growing your own funds?
Also, just because your money is in a bank doesn’t mean the bank has to give it back to you on demand. They may have withdrawal limits or charge fees or penalties for closing certain types of accounts early.
And keeping too much money in one account can put you at risk of losing it should the bank go under, depending on their insurance limits. Another thing to keep in mind is if the bank merges with another bank, your account could be tied up in the transition, limiting access to your funds and maybe even causing you to lose interest payments.
Saving Instead of Paying Off Debt
Another reason why saving money could be working against you? Well, it may be preventing you from paying off debt.
Why? Because holding on to that debt and paying it down slowly over time with small monthly payments is costing you more money. Your interest fees keep accumulating and, depending on how much you owe and how long you’ve been paying, a significant portion of your monthly payment is going towards interest.
When you take a loan, like a car loan or a mortgage, the loan company determines how long it will take for you to pay it back. Then, they determine how much interest you will be charged for the life of that loan. They add this amount to your loan amount and divide it by your loan term to determine how much you will pay each month.
The drawbacks? Your first payments will credit more to interest than principal because the loan company wants to make sure they get all their profit before you pay off your balance. The longer you carry that loan, the more you end up paying over time. Money that could have gone towards something better.
To put it into perspective, it requires simple math. Take this, for example, a savings account usually pays 3 to 4 percent interest and a loan usually charges anywhere from 6 to 15 percent interest depending on your credit score. Does it make more sense to keep your money in savings earning just 4 percent return while you’re paying 10 percent or more for a loan? Likely not.
Not Saving the Right Way
Since banks have such low-interest rates, they don’t always make the most sense for long-term savings. The advantage of having it in a bank is that your money is relatively liquid, meaning you can take it out when you need it. However, the tradeoff is you could be earning more money by investing that money into the stock market.
The bottom line is that you have to take a look at your full financial picture before determining if you’re better off saving now, or using your funds for something else and saving later.