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Growing up, a lot of us learned that the smartest thing you can do with your money is to put it in a savings account. Money in the bank meant you were secure and responsible, maybe even wealthy.
Your parents and teachers meant well with their advice, but the old-fashioned mindset of putting all your money in the bank doesn’t work in today’s economy.
If you’re not careful, putting your money in a savings account can make you broke because the interest your money earns can’t keep up with the cost of inflation.
To make matters worse, many banks charge monthly fees to hold your money in a savings account.
Yet, we all need cash in the bank in case of an emergency.
In this article, we show you how to put money into a savings account without going broke along the way, by saving strategically and choosing a better-than-average bank.
Savings Accounts Can Drain Your Wallet
Saving money means losing money, thanks to the way inflation devalues your cash.
That’s because the money you put in a savings account typically doesn’t earn enough interest to keep up with inflation.
For example, the average inflation rate from 2018 to 2019 was 1.76 % while the average savings account interest rate was 0.09% during the same time.
If your bank paid a one-percent interest rate that year, you ended up losing .76% to inflation.
You can generally assume an average 2% inflation rate, but some years are worse:
- 2018 inflation rate: 2.49%
- 2008 inflation rate: 3.84%
- 1990 inflation rate: 5.4%
Not only does a savings account lose money because of inflation, but many people are paying monthly maintenance fees!
Putting too much money in a savings account is a guaranteed route to broke because inflation grows faster than your money.
Should You Put Any Money in a Savings Account?
We all need emergency cash savings to protect ourselves and our family from financial surprises such as repairs, medical expenses, or loss of income.
Even though putting your cash in a bank isn’t free, that doesn’t mean you shouldn’t save money in the bank.
Use a bank to save your emergency cash fund (equal to six months of living expenses), then put your future income toward investments that make your money grow.
For example, a healthy emergency fund equal to six months of living expenses buys you and your family protection from unexpected financial events. It also gives you peace of mind that’s well worth the cost.
To offset the costs of your emergency savings fund, look for a bank with higher interest rates and zero fees, while limiting the amount of your savings to no more than six months of living expenses.
How can you find a bank that cuts your costs? Pick up the phone and call around!
- Ask, “Do you charge any monthly fees for a savings account?”
- Find out how much interest the bank pays on your savings
- Or, save yourself the time and use our recommended online bank – CIT Bank. The interest rates are many times higher-than-average, and they charge ZERO monthly maintenance fees, which makes it a great option when you make an initial deposit of $5,000.
Find a bank with zero monthly fees that pays a higher-than-average interest, so you can keep your emergency savings in an account that costs less.
Stop saving once you’ve banked the equivalent of six months of living expenses.
Once you have six months of expenses saved, it’s time to put your money toward assets or investments that give you a better return and make your money grow.
How to Build A Savings Account
Find out how much of your paycheck you should allocate to savings as you’re building an emergency fund. Plus, get tips for filling up your emergency fund quicker.
A healthy emergency savings fund should equal six months of living expenses, no matter your age, lifestyle, or income status.
The best way to build an emergency fund is to split your saving into two phases:
- Begin with a short-term savings fund of $2000.
- Gradually build a full savings fund equal to six months of living expenses.
How much should you sacrifice to build your emergency savings?
Freeze your spending now if you have less than $2000 in your savings account.
If you have no emergency savings, then any financial surprise – no matter how small – can affect your ability to work, eat, or keep the electricity on and a roof over your head.
For example, if your car needs a new brake line, it will cost you about $1000. If you don’t have the money for a new brake line, you either have to stop driving or put yourself (and passengers) in danger.
If you can’t drive your car, you have problems getting to work and work-related events. Now, your entire income is at risk because you didn’t have the $1000 for car repairs.
Nothing is more critical to your future security than funding the first $2000 of your emergency fund, so until you reach that amount, put all your spending on hold.
Once you’ve saved $2000, allocate a portion of your income toward funding your full emergency savings.
You should allocate between 10 – 20% of your total income, depending on your situation, to savings until you’ve banked six months of living expenses.
While you’re building your emergency savings, you’ll also allocate a percentage of your income to things like investing and spending, so this phase of savings is much easier than funding your first $2000.
Tips for Saving Money
How much should you give up to reach your savings goals?
Funding your savings account presents a massive challenge if you live in America because lifestyle habits and peer pressure don’t support financial security.
That’s why most people in America have less than $1,000 in savings accounts.
Most Americans don’t have the money for car repairs, medical emergencies, or computer or phone repairs, yet these things happen all the time!
That means if they lose a job, their car breaks down, or if there’s a medical emergency — their financial lives are on the line.
Building your emergency savings is only hard while you’re adjusting your mindset. Once you get the hang of spending less and earning more, it actually becomes fun to watch your goals getting closer and closer.
The good news is, once you develop the traits you need to save money, this same mindset will help you become wealthy:
- Delayed gratification
- Determination
- Building a growth mindset
- Ability to control impulsive spending
1. Pick up side work.
If you can’t build a $2000 short-term savings fund in under six months, pick up a side hustle or find new ways to earn extra money.
2. Stop using credit cards and loans to buy things you can’t afford.
It only eats up your future income and adds additional fees and expenses that don’t contribute to your quality of life.
3. Skip the Starbucks.
Instead, make coffee at home using a $10 french press or coffee maker. Check your grocery store, manufacturers, and Amazon for savings on buying coffee in bulk.
4. Spend your food money wisely.
Most people can save about $300 a month by avoiding food waste and restaurant spending.
Even though most American households have less than $1000 in savings, the average person still blows $250 a month on eating out and throws away $44/month of food per person.
Skip restaurant food and commit to cutting your food waste, and you can probably save an extra $300 a month!
5. Carpool to work and save money on gas.
6. Shop at the least-expensive grocery store while you’re building your emergency fund.
7. Use a coupon service like Honey to help save money when shopping online.
8. Ask for a raise. You can increase your income by 5-10% just by asking.
By changing your mindset and finding new ways to save money, you can build an emergency savings account, so you and your family are protected from unexpected financial emergencies.
Strategic Savings Helps You Build Wealth
Use a savings account to store your emergency fund, but after you save 6-months worth of expenses you need to be investing your money.
Find a bank, such as CIT, that offers better interest rates and no monthly fees, so you can get the most value from your savings.
We recommend a $5,000 deposit with CIT Bank – Open an account today.
Saving without a plan can lead you down a path to “broke” unless you save strategically to lay a foundation for building wealth.
