Savings Account as Investment

Quite often, I’ll get emails from readers saying that they’re looking to invest their money and that the money they want to invest is currently sitting in a savings account. What these readers often overlook is that the money in their savings account is already invested.

An investment simply means that you’ve put aside a resource for future use with the hopes of gaining a return on that money. A person can invest in anything from baseball cards and stamps to real estate and stock investments.

I usually look at three big factors when thinking about an investment.

Rate of return How much of a return on my money can I reasonably expect with this investment? For example, over the long term, a reasonable rate of return to expect from a broad stock market investment is 7%. If you invest in a savings account, a reasonable rate of return is about 1% right now.

Risk How likely is it that I’m going to get the return I expect with this investment? With stocks, there’s a significant amount of risk, particularly over the short term. If you bought heavily into stocks in early 2008, you probably lost 40% of your money. On the other hand, if you put your money in a savings account in any year, you had a small positive return, just like clockwork.

Liquidity How easy is it for me to get my money out? Savings accounts are incredibly liquid – all you have to do is visit an ATM. Stocks are a bit less liquid, but you can usually sell them quite easily through your broker. Other things, like real estate or CDs, are not very liquid, as you incur losses for cashing out a CD early and real estate sales require a buyer before you can get your money out.

As you can see, a savings account registers on all of these factors. A savings account is a highly liquid, very low risk investment with a low expected rate of return.

You can make similar statements about a lot of investments. An index fund of all American stocks is a highly liquid, moderately risky investment with a medium expected rate of return. Vintage baseball cards are a fairly illiquid, moderately risky investment with a medium expected rate of return (based on my experience). A CD is a fairly illiquid, very low risk investment with a fairly low expected rate of return.

The question then becomes how do you decide where to put your money? Again, I use a few simple rules of thumb to compare the investment types.

The sooner I need the money, the less risk I’m willing to accept. If I’m saving for retirement, I’m fine with significant risk. If I’m saving for a car I intend to buy in six years, I’m fine with some risk. If I’m saving for an air conditioner repair in five months, I don’t want much risk at all.

If I’m going to possibly need the money quickly, I need it to be pretty liquid. In other words, I would not put my emergency fund into real estate or collectibles, nor would I put it all into a certificate of deposit. These investments have their place (a long-term goal), but they’re certainly not for everything.

If I absolutely must hit a certain dollar amount at a certain time, I’ll lower my risk and focus on raising contributions. For example, if I have to have $100,000 to pay off my ARM in four years, I’m not going to want to put that money in a risky investment where the balance can unexpectedly slip away from me. I’d rather put it in something with a lower rate of return with much lower risk and focus on increasing the amount I can save.

Rate of return rarely plays a role in these decisions. I generally focus on liquidity and risk first and foremost, and when I have those figured out based on why I’m investing, I try to find the best rate of return for that amount of risk and liquidity.

Thus, quite often, savings accounts are my preferred investment vehicle.

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  1. John says:

    I’ve never heard of a savings account paying close to 1% interest. Mine currently pays .25%, and I’m at credit union.

  2. Vanessa says:

    I’m with ING which is now paying .9%. Whoop-dee-doo.

  3. Vanessa says:

    Correction. ING was paying .9%. Just checked my account and it has dropped to .85%.

    Sorry, but with interest rates like these, telling me that my money is still invested is not reassuring whatsoever.

  4. Johanna says:

    As usual, you’re ignoring inflation.

  5. Riki says:

    Is a savings account technically an investment? Sure, I suppose so.

    But I don’t think it’s a very good one. I definitely agree that everybody should have some very liquid assets, however, money just sitting in a savings account really could be put to much better use.

  6. Riki says:

    If you play it TOO safe, as with considering a savings account to be an “investment”, ultimately you lose out. The rate of return on a savings account doesn’t even come close to matching inflation. So every year the money just sits there, it loses some purchasing power even as it’s growing in tiny (almost negligible) amounts. On the surface it looks like a savings account would be an extremely safe investment with a correspondingly low rate of return. But upon closer examination with a basic understanding of how the economy works, the reality is that “investing” in a savings account will only lead to actually losing money down the road.

    So, while yes, a savings account does technically meet the definition of an investment as presented here, I don’t agree that it should be considered an investment. This is really crappy advice, Trent.

  7. valleycat1 says:

    Timely – Just this week I closed my savings account with a major bank because a ‘service fee’ appeared on this month’s statement – after over 5 years of no fee – & I can see no reason why the fee would have been charged. The account isn’t big enough (or in reality, even useful enough to me) to make it worth an interminable call to CS to figure this out or get it waived. But the fee was enough to wipe out any of the meager interest the account had earned over those years. I’ll just keep track of the money that’s not to be spent out of checking, or could start sweeping it into another MM account we have if I get too tempted to spend it.

  8. Sara says:

    This comment moderation is ridiculous. I tried to phrase my comment three different ways, and they are all stuck in moderation. I don’t understand what is potentially offensive about anything I said. Just trying to give advice to investing beginners.

  9. jim says:

    John, My ING account was paying >1% not too long ago. My WAMU account was paying 4% a few years ago. In years past >1% on savings was pretty common/typical. The only reason savings pays <1% now is that interest rates are sooooo low.

  10. kevin says:

    Sara – re: moderation, it’s the luck of the draw. The other day some would be swingers were giving out their phone numbers trying to hook up. Apparently THAT sailed right through.

  11. Vanessa says:

    @ Kevin

    Say what? The most interesting thing to happen on this blog and I missed it?

  12. lurker carl says:

    Yeah, it was graphic stuff. Meanwhile, innocent discussions about beef stew, savings accounts, washing clothes, taxes and car tires are exiled into moderation pergatory for all eternity.

  13. Kevin says:

    @John & Vanessa

    You guys aren’t looking very hard. I’m getting 1.20% in my Renaissance high-interest savings account (tax-free, in my TFSA I might add). Still nothing to open champagne over, but if you’re going to nitpick Trent, at least be right about it.

  14. Kevin says:

    @Riki:

    What exactly was the point of your comments? You twice conceded that Trent is correct about savings accounts being an “investment,” but ended by saying this post is “really crappy advice.”

    OF COURSE the money “could be put to better use,” but then that’s not the point of an Emergency Fund, is it? The money you spent on beers last Saturday could have been put to better use, too, but nobody’s picking on you over that, so why apply long-term savings standards to short-term, high-liquidity needs like an emergency fund?

    Listen guys, I’m as quick to critisize Trent as the next guy, but honestly, this is getting a little ridiculous. Most of you just seem to take a critical stance by default, and make negative posts, even when you can’t find anything of substance you actually disagree with! I mean seriously, what exactly are you disagreeing with here? Are you claiming you SHOULD invest your emergency funds in a high-risk, low-liquidity vehicle, just to get higher returns? Johanna, are you saying your emergency fund savings should be invested somewhere that at least matches inflation? Great! Where exactly might that be, hmm? I’m all ears, Johanna! Please, do tell! Where can I put my emergency money where it remains highly liquid, the principal is guaranteed, and earns a return at least matching inflation?

    (cue crickets)

    That’s what I thought. Honestly guys, give the man a break. This was actually a pretty good, informative post.

  15. Johanna says:

    Kevin, you and your straw-man arguments remind me of the bird that’s been flying full speed into the same spot on my parents’ living room window every five minutes for about a year and a half: equal parts annoying, hilarious, and weirdly admirable for its persistence.

  16. Kevin says:

    Sooo…. is that your way of saying there IS no savings account paying a rate that beats inflation?

    Then why did you bring it up?

  17. Johanna says:

    Inflation risk is real risk. It turns your risk-free “small positive return, just like clockwork” into a variable return that’s usually negative. There are still good reasons to have some money in a savings account. But saying that it’s risk free is not accurate, and it’s not doing anyone any favors.

    On the post in general: It’s blindingly obvious that someone who writes to Trent to say “I’ve got some money in a savings account, and I want to start investing – what do I do?” is looking for information on stocks and bonds and mutual funds and how to set up a Vanguard account – not a pat on the head and a condescending “But you already ARE investing – keep it up, little man!” Trent is substituting word games for real advice – just as he did when he wrote exactly this same post less than a year ago.

  18. Riki says:

    (Great answer, Johanna.)

    Suggesting that having the money in a savings account is an adequate investment strategy is absolutely terrible advice. I conceded that “technically” the savings account meets the definition of an investment as presented by Trent, but no reasonable financial planner would consider that money effectively invested. Generally people who ask about investments aren’t talking about parking their emergency fund.

    Anyway, the question as presented doesn’t mention an emergency fund (and Trent only brings it up once), so I don’t know why you’re so hung up on that point, Kevin. Emergency funds and investment strategies are two different topics.

    Ultimately the tone of Trent’s response is that a savings account qualifies as a good investment strategy. He even calls it his “preferred investment vehicle,” so overall, Trent’s answer is misleading. I pointed out where he was being misleading. If that’s not “finding something of substance” to criticize, then I’m afraid I don’t know what you expect from me, Kevin.

    Trent’s answers are generally very one sided, with a huge bias away from risk, and he usually demonstrates a very unnuanced and simplistic understanding of how the economy works. I am far (far) from an expert in these matters and even I can find significant and frequent faults with his advice. I’d hardly call that defaulting to negativity.

  19. Kai says:

    If your ‘investment’ isn’t even covering inflation, that’s quite a stretch of a definition.

  20. Kevin says:

    @Kai:

    What definition of “investment” implies that it must beat inflation?

  21. Kai says:

    does one consider ‘putting money under your mattress’ to be an investment?
    Investment suggests that it is going to make money. If it doesn’t make enough interest to cover inflation, it’s losing money, not generating it, and any claim of ‘investment’ is on a technicality.

  22. Kevin says:

    Kai: I cannot find any credible definition of “investment” that says anything about beating inflation. You’re making stuff up.

    Google this: “define:investment”

    You get:

    in·vest·ment/inˈves(t)mənt/Noun: 1.The action or process of investing money for profit or material result.
    2.A thing that is worth buying because it may be profitable or useful in the future.

    “Profit” is in both definitions. Putting $x in a savings account and getting $x + 1% is profit, so it is an investment. Whether or not it beats inflation is completely irrelevant.

    Or how about the Wikipedia page for “Investment?”

    “Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time.”

    Again, nothing at all about some made-up requirement to “beat inflation.” In fact, the word “inflation” doesn’t appear a single time on the entire Wikipedia page!

    Face it, you’re simply wrong on this one. There is absolutely, positively no explicit or implied requirement for an investment to beat inflation in order to be considered an “investment.”

    It might not be a GOOD investment (especially if it carries any amount of risk at all), but it absolutely does meet every accepted definition of an “investment.”

    Claiming that something must beat inflation in order to qualify as an “investment” is as asinine as claiming that anything that DOES beat inflation IS an investment. I won $10 on a $4 scratch ticket last week. I guess that’s an “investment?” I won $200 playing poker in Las Vegas. I guess that’s an “investment?” My friend playing the same game with me lost $50. So I guess it was an “investment” for me, but not for him?

    See how silly it all sounds? “Investment” has nothing to do with inflation. NOTHING. It has an expectation of a positive return. That’s it, that’s all.

  23. Johanna says:

    If your “investment” is not beating inflation, then in inflation-adjusted dollars you’re not making a positive return.

  24. Kevin says:

    Again, the definition of an “investment” says nothing at all about “inflation-adjusting” your dollars.

    You guys are simply trying to force a bogus definition onto Trent, and then critisize him for it.

    $101 is greater than $100. If your “investment” grew from $100 to $101, then it’s an “investment.”

    It’s not a great one, but it absolutely, positively meets the definition of an “investment.”

    End of story.

  25. Johanna says:

    Did I mention that the bird I was talking about earlier takes a crap every time he hits his head on the window?

  26. Johanna says:

    I’m sorry. That was petty of me. To respond to an actual point Kevin made earlier:

    The various definitions of “investment” hinge on the *expectation* of a positive return. Lottery tickets and other forms of gambling sometimes give a positive return, but the expected return (in the mathematical sense, not the psychological sense) is negative. For that reason, lottery tickets are not an investment.

  27. Riki says:

    Kevin, again, you’re getting hung up on a technicality.

    In this specific article, Trent is implying that having money in a savings account is effectively invested. He calls it an investment vehicle (his preferred one!), compares it to other investment types, and generally gives the impression that putting your money in a CD, the stock market, or a savings account are all different but valid investment options.

    Yes, you get a small return on money in a savings account — but in the sense of a long-term, wealth-building investment, a savings account shouldn’t even be on the radar let along referred to as a preferred investment strategy. I maintain that the tone of the question and Trent’s answer are referring to this type of situation and therefore he is flat-out, no-bones-about-it wrong to suggest a savings account.

    I don’t care that it technically meets the definition of an investment. Calling it such is misleading.

  28. Kevin says:

    Riki: I think we’ve finally reached a point of mutual agreement. :) I can agree with everything you just wrote.

    Johanna: I appreciate the apology. Of course, you’re precisely right about the lottery example failing the definitions of “investment” I’ve quoted here.

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