Can You Lose Money In A Savings Account?
Can you lose money in a savings account? The answer might surprise you so stick around for the answer.
Savings account are great to have but many people don’t know that the interest rates offered for savings accounts are not the best.
But, can you actually lose money in a savings account?
It’s crazy to think about losing money in a savings account but you might be losing money so let’s dig deeper to find out how…
Do You Lose Money In A Savings Account?
Yes, you are most likely losing a savings account over time relative to inflation which makes your money have less purchasing power.
So, you are not technically losing money as you would when a stock drops in price.
You will see the same amount of money in your bank account over time if left untouched or even some more but don’t let this fool you.
Your money will be losing purchasing power because inflation usually rises faster than the interest rates on your savings account.
Let’s go deeper into inflation to see how it works…
How Inflation Kills Your Savings Account
Inflation is a funny topic. It’s one of those things that you know exactly what it is, even if you read the word and think you don’t know what it is.
Inflation in simple terms is the rise in the cost of goods and services over time.
An obvious example is food, a burger once cost 50 cents, now they’re over 5 dollars!
While a $10 bill might have gotten you 20 burgers in 1960, that same $10 bill now gets you only 2 burgers.
This my friends is a decrease in what we call “Purchasing Power”
The measure of how quickly inflation goes up and “purchasing power” goes down is called the inflation rate.
It’s kind of a big deal in the world of economics. Inflation rates are always determined when looking at a country’s economy.
They are commonly expressed as an overall percentage (ie. a 10% increase over the past 10 years) or as an annual average (ie. a 1% increase per year).
Enough background info for now. How exactly does inflation kill your savings account?
The answer is simple: you’re losing “purchasing power” faster than you’re actually earning the money!
Whenever you want to see the “true” amount of money made, you need to find your inflation-adjusted returns.
This is really easy to do… Just take the percent return and take away the percent inflation for the same time period!
Inflation Adjusted Return % = Total Return % (in a period of time) – Total Inflation % (in the same period of time)
If you use the formula above, with the current interest rates, you’ll pretty much be guaranteed to have a “Negative Return”… which means losing money!
Check out the below example for a demonstration…
Savings Account Losing Money Example
Nick saved up $5,000 of his salary by the time he turned 21.
Nick puts this $5,000 away in a Chase Savings Account that pays 0.01% interest annually. This is one of the many savings accounts he could have chosen but he goes with Chase since it’s a recognized bank.
With his Chase savings account, 5 years from now, with 0.01% annual interest, Nick will have $5,002.50.
So, Nick didn’t lose money, in fact, he made money even though it’s such a small amount.
But, how much “purchasing power” did Nick really gain? A safe bet is to assume 2% annual inflation for the future.
Using an inflation-adjusted savings calculator you can find your purchasing power after a set amount of time.
In this example, we get $4,530.92 after adjusting for inflation. So, Nick actually lost money in terms of purchasing power, $471.58 to be exact!
Why Do We Even Use Savings Accounts?
If savings accounts lose you money, then why would you use them?
Well, they are great for one thing: short-term, accessible savings.
If you are saving small sums of money in the span of under a year or so, there is no real point in investing your money in something long-term.
The money is easily accessible in a savings account, which is part of the reason why the interest offered is lower.
You can take your money out any day, and nearly all banks have no-fee savings accounts!
Sure there are options that pay more, but you also sacrifice accessibility.
This accessibility trait makes it ideal for emergency funds, where you can keep small amounts of money to cover unforeseen expenses.
Another great benefit of using savings accounts, in the U.S at least, is that your money is FDIC insured for up to $250,000.
Simply, savings accounts are not used for investments, they are used to keep your money safe and accessible for short-term goals.
What Should You Do?
I know this is a big eye-opener for you but I’m not telling you that you shouldn’t use a savings account.
In fact, you should use a savings account but you need to use the right one.
When we went over the example above, a Chase savings account will only give you $2.50 over 5 years with a $5,000 deposit which is horrible!
If you want to use a savings account then I recommend using one at an online bank like CIT Bank.
CIT Bank’s saving account currently offers a 0.40% APY which is 40x more than Chase’s saving account!
In the example above, with CIT Bank’s saving account and a $5,000 deposit you will earn $100.80 in interest in 5 years which is $98.30 more than Chase.
Adjusted for inflation, your purchasing power will be $4,619.95 which is $89.03 greater than Chase’s savings account.
Yes, you are still losing money but that will occur with all savings accounts.
The point here is to choose a savings account where your purchasing power decreases the least!
CIT Bank has great savings accounts that I highly recommend using but if you want to use another bank then make sure they offer a high-yield savings account.
Conclusion
You now know the answer to the question, can you lose money in a savings account?
After reading this, you should understand why leaving your money long-term in a savings account is a bad idea and will cost you. Now, all that’s left is for you to use this info wisely!
If you want long-term wealth building, but don’t know where to start, a passive ETF is the way to go.
This lets you get exposure to a lot of stocks at once instead of having to pick and choose separate ones.
You should also look into CD’s and bonds to higher returns than with a savings account.
If you liked this article then I recommend checking out my posts on How To Manage Your Money Like The Rich and How To Budget Money On Low Income (11 Best Ways).
What do you think about saving accounts? Did this information surprise you? Let me know in the comments below!
