Kids, gather round, because an old man wants to tell you a story of the glory days. It was 2007, and you could put your Money in a savings account earning an annual interest rate of 5 percent. It’s true! I have the receipts!
Nowadays, even if you open a “high yield” savings account at an online bank, the best interest rate you’re likely to see is around 0.5%. That’s half a percent. Throw $2000 into a savings account, and in just one month you’ll earn an inspiring 83 cents of interest.
It’s tempting to look at this situation and think, “Eighty-three cents is insulting! What do I need to do to earn an amount of interest that I couldn’t scrounge up from my couch cushions? Should I invest this money?”
While we love earning interest, we’re budgeters, and we think there’s a better way to get more out of your savings: appreciate it for doing its job, even if it isn’t working as hard as it possibly could to scrape up every penny of interest.
My Money is SO BORED
One thing we’ve learned from being in the budget business is that the clearest sign of a healthy budget is that money sits around waiting to do its job.
I’ll give you an example from my own budget. Here’s a hopeful little category:
Yep, that’s $3.17 a month set aside to renew the family’s passports. Mine isn’t up for renewal until summer 2028. That means some of the money in this category is going to be sitting around for over seven years.
Isn’t that great? Future me is going to be stoked!
If you’ve been using YNAB or any sort of envelope budget for more than a few months, you’ve probably had the feeling of checking the budget category for an annual bill and finding that the money is just sitting there, exactly when and where you needed it.
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Wait, What Does This Have to Do With Earning More Interest?
Compound interest really is magical. But in order for the magic to show up, at least two and preferably all three of these things have to be true:
- The interest rate is high.
- A large amount of money is involved.
- The money is sitting and earning interest for a long time.
In a typical person’s lifetime, even when interest rates aren’t stuck in the gutter, there are really only two situations where these factors truly converge:
- Debt. High-interest debt is the power of compound interest turned against you.
- Retirement savings. Start saving early to really see the magic of compound interest.
And maybe college savings, if you’re fortunate enough to be able to save aggressively for college early in your child’s life.
To put it another way: the returns you earn on your retirement savings and the interest rate you pay on your debt can have a meaningful impact on your standard of living. The interest you earn on your savings or checking account almost certainly won’t.
Okay, Now Cheer Me Up
Gladly! What’s one of the best feelings in life? It’s the feeling of having one less dang thing to worry about.
The amount of interest you’re earning on your savings—even your emergency fund—is one of those dang things.
Now, if you enjoy chasing the highest rates, or new account bonuses, or reward checking accounts, or points, that’s great! YNAB can even make the quest easier by allowing you to give all of your money jobs, regardless of which account the money is in.
But simplicity is also a virtue. We love it when we hear from YNABers who keep all of their budget money in a single checking account. Are they missing out on a bit of interest? Sure.
Or you could look at it this way: they’re paying a modest price to not have to worry about chasing interest rates, or making a minimum number of debit transactions, or pulling out the right credit card at the right store, or verifying that the money is in the right account for the bill they’re about to pay.
But When Should I Start Investing the Money Rather Than Save It?
Savings are really underrated—much like Maya Rudolph and rotisserie chickens from Costco. I hope you’ve gathered that theme from this post—that there is real value to money sitting in your savings account. And while most people need to hear the reassurance that building up savings in a boring deposit account is a lovely thing to do, others might be feeling like their savings has grown too large.
If you’re in that camp and chomping at the bit to learn more about investing, check out Jesse’s beginner guide to investing: Invest Like a Pro. It’ll get you dialed in to retirement savings and other investment vehicles and help prioritize those dollars in the proper order.
The Joy of Saved Money
Before you go off and fall in love with all things investing (it is kind of fun), don’t forget the benefits of highly liquid money sitting in your checking or savings account and earning piddly bits of interest. When an emergency hits, when you need an influx of cash—it’ll be right there at a moments’ notice. No timing tax bills, no stress about market fluctuations—the real ROI is the stressless use of your cash.
Money sitting around in your budget and earning minimal interest is totally fine. It’s better than fine. It’s what a budget is designed to do.
Matthew Amster-Burton is a former financial planner, podcaster, author, comedian, and fairly good singer. When he’s not helping people gain total control of their money, you’ll find him daydreaming about his next trip to Tokyo or learning a new language. You can hear him every week on Spilled Milk Podcast.
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