Those Savings accounts that every single Bank in the world offers? Yeah, those are scams.

If you’ve ever heard about a checking account (accounts where you can quickly withdraw and deposit your money but earns no interest), chances are you’ve heard of a savings account. And apart from the slower, more delayed transaction times, saving accounts offer this magical thing called interest.

Interest is of course a payment that the bank makes into your savings account from a percentage of your total savings. For instance if you had $100 saved and the bank offered a 5% interest rate paid yearly, you would gain an additional $5 that year just for saving your money in that account.

So the bank’s paying you to store your money with them. Sounds like a pretty nifty deal right?

Well it’s not.

Unfortunately the banks are choosing not to tell you key financial and economical information that could complete change your mind on whether or not opening a savings account is a smart idea. To understand why let’s start with the basic fundamentals of a savings account, interest.

Why do banks pay such a low interest rate?

The first thing you’ll notice when applying for a standard savings account is this abysmally low interest rate, we’re talking in the range of less than 1%, maybe a bit more than 1% if you’re lucky. We won’t even speculate, here’s the interest rate paid yearly (link leads to source, not referral links) on regular savings accounts on some of the US’s biggest banks:

Wells Fargo – 0.01%

Bank of America – 0.03%

BB&T/Suntrust  – 0.03%

The online banks fair a bit better(they pay higher interest since they do not have the same overhead costs to maintain buildings that regular banks do):

Capital One – 1%

Ally Bank – 2.2%

And here’s a few banks from other big countries and their rates:

HSBC(UK) – 2.3%

Royal Bank of Canada – 1%

A mixture of pitifully low interest rates, like Wells Fargo’s 0.01% and some more respectable rates, Ally’s 2.2%.

And yes, there’s a few extra things to point out.

Some countries have to pay income on interest gained that can cut interest even further (Ireland’s tax on Interest, the Dirt Tax, is 39%). Some savings accounts require minimum deposits and pay different rates depending on the amount deposited. Some banks charge additional fees, have minimum holding times to or have limits on how many withdrawals you can make per year.

As to why they’re so low, banks need to make money too, and they do so via a process known as asset transformation. To greatly oversimplify, banks take your money and pay you a measly interest rate and then lend that money out as loans. The interest they earn on the loans in theory is far greater than the interest they pay to you and therefore they profit. So in essence, they pay you less so they can earn more.

There’s nothing inherently wrong with this, nothing that makes this a scam. You as an individual are going to have a much harder time loaning out that money and actually gaining interest on it than a bank will. The regulation, law, convenience, it’s just not there for you, and you have most likely already accepted this. But savings accounts are still scams.

Savings accounts cause you to lose money

Whenever we speak about money we need to remember our good friend, inflation. Inflation is a very important concept in economics and refers to the increasing prices of goods and services. Ever heard your parents or grandparents mention how they earned 50c an hour, or how a gallon milk used to cost a dollar? Those prices and wages were so low compared to now due to inflation.

Why inflation happens isn’t so important right now, what’s important for you to know is that it does happen. The reason for that is simple, the higher the inflation rate, the more things cost and the less your money is worth.

Here’s an example:

Last year $5 could buy you a big bar of chocolate.

The inflation rate is 10%, so over the last year the prices of goods and services have increased by about as much. The chocolate bar is now $5.50. So your $5 is worth less this year than last, you can no longer buy that same chocolate bar with it.

Now let’s do some math with real world numbers:

Let’s say you were to open a savings account in Bank of America, they have a nice interest rate of 0.03%. At first you deposit $10,000 dollars. Also at this time a generic new car costs $10,000 dollars. So, in our first year your money can buy a new car. But as the year goes on, inflation occurs. Let’s implement the real current inflation rate, 2.1%

So at the end of the first year, you will have gained 0.03% interest or $3, bringing your new total savings to $10,003(give or take a few cent depending on if the interest is compounded monthly).

However, inflation at this time cause car prices to increase by 2.1% or by $210 totaling up the new cost of a car to $10210.

In year 2, the same amount of money will not buy you the same good or service. The tiny interest you’re paid is not even enough to keep up with inflation. Ultimately, every year your savings buy you less and less. I feel like that’s pretty vital information that banks fail to properly disclose. 

How do you counter inflation?

Banks are safe and convenient, and isn’t it better to at least gain some interest than storing your money as cash and earning none? The thing is, you have other options. Since it’s clear that most banks don’t offer nearly enough interest (although Ally did offer 2.2%, this will still result in a break even at best), the most logical thing is to turn to other investments.

I will eventually write a post on what other investments I would recommend, including those I have myself, so I won’t go into too much depth here, but saving accounts are not the way forward. Other forms of saving can net you much, much higher interest rates. Various securities, Bonds, Index Funds, mutual funds, hell even regular stocks.

Just googling those terms will net you millions of other articles detailing how much better they are than regular savings accounts, and since I’ve yet to write anything about them myself, for now that’s what I recommend you do.

To conclude, I understand that going through the hassle of researching other investments can be a lot, but it’s something you must take as seriously as your career, after all over your lifespan those extra percentages can add up to tens of millions of dollars.