What is saving?
Saving is the extra money we are left with after meeting our expenses from our income. It is the difference between our total income and our total expenditures.
There are several things we can do with that extra money. We can either leave it at home (the worst option) or keep our extra money in a bank, such as in a savings account or invest it.
In this post, I will cover how much money we should save in a bank vs investing it to grow it.
Advantages of having a savings account in a bank
First, and foremost, we need to understand money loses its value over time because of inflation. So, even though the interest paid on a savings account is not very high, we still get some interest to compensate for loss happening from inflation. Thus, it is certainly better than keeping it in your house, as you don’t earn any interest when you keep it at your house and will lose its value due to inflation.
However, the best part about a savings account is that your money is safe in a bank, as most commercial banks in the US are insured by FDIC. FDIC is Federal Deposit Insurance Corporation that insures that will not lose their money if that bank goes bankrupt.
In other words, people who deposit money in a savings account protected by FDIC for up to $250,000.
So, when looking for a savings account, make sure your bank has FDIC insurance. Also, if you want to select a bank for a savings account, you should look for one that charges the minimum fee for you to hold an account.
Another important use of keeping money in a savings account is that you can withdraw it for expenses such as a down payment for a car or a house.
Get that Emergency fund established first
People also keep money in their savings accounts for emergencies. I strongly feel everyone should create an emergency fund. If something were to happen to our income, we should have at least 6 months’ worth of money to survive.
So, keeping money in a savings bank doesn’t make you rich, but it helps in creating an emergency fund and meeting some big expenditures. So before, we start investing, we should have at least 6 months’ worth of money in a savings account for emergencies.
This can change based on the size of the family and sometimes people need up to 12 months’ worth of expenses if the family size is big.
Anything after that, we should invest if we want our money to grow.
What do we mean by investing?
In finance, investing means when you invest your extra money with the hopes to grow it. The most common forms of investment are stocks, bonds, an index or a mutual fund, commodities like gold and silver, and real estate (property).
If you are interested in learning more about these options, you can check out my post here.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make any investment decisions.
