Banking on History: The Advantages and Disadvantages of Saving Money in a Bank

By
Wahed Editor
September 16, 2022
Banking on History: The Advantages and Disadvantages of Saving Money in a Bank

When you think of the word “money”, one of the words you probably think of next is “bank”. That’s not surprising - banks are age-old institutions that are deeply ingrained in our modern society. The history of banking is rich; the first documented bank is the Banca Monte dei Paschi di Siena, founded in 1472. Since then, the financial services sector has ballooned to a value of about $22.5 trillion, which is roughly 20% of global GDP. When it comes to saving money in a bank, it’s worth understanding the pros and cons so you can make the best decision about where to save your money.

 

What is banking? 

Banking is the business of providing financial services to customers, most essentially accepting deposits and making loans. As time has progressed, banks have evolved from institutions that primarily served as a place for people to store their gold or other valuables into institutions that provide consumers with many different types of services. Nowadays, they provide more than just physical space for their money; they offer access to ATMs, online banking systems, credit cards and loans. These days you can even open up an account that gives you access to these services without ever having to set foot inside a branch.

 

3 advantages of saving money in a bank

Safety. When you save money in a bank in the US, your money is protected by the FDIC (Federal Deposit Insurance Corporation) for up to $250,000. This means that if your bank fails, but is a member client of the FDIC, you will not lose your money up to that amount. The equivalent insurer in the UK is the FSCS (Financial Services Compensation Scheme), which insures up to £85,000 per eligible person, per bank, building society or credit union.

Liquidity. Money in a bank is liquid, meaning it’s readily accessible as cash. That’s not the case with investments in assets like stocks, bonds, and real estate. Think of it this way: if you want to go out for dinner today, you can walk to an ATM and get cash instantly, or easier still, pay with a card at the venue. You might run late for tonight’s dinner if you need to sell a stock, bond, or apartment in exchange for the cash you’ll need to pay your bill.

Interest on savings. When you deposit your savings in a bank account, the bank pays interest on it; meaning that over time, your money will grow and be worth more than what it was when you first deposited it (if the interest rate exceeds the inflation rate, that is).

 

3 disadvantages of saving money in a bank

Low interest rates. The interest rates that banks offer on savings accounts are often lower as compared to CD’s (certificates of deposits), money market accounts, or the returns provided by stocks.

Inflation. When inflation rises, the purchasing power of your money decreases. Unless the interest rate on your savings is higher than the inflation rate over a given timespan, you may actually be losing money on a net basis.

Minimum balance requirements. Some savings accounts have monthly maintenance fees or minimum balance requirements. Failure to meet these requirements leads to deductions from your account, which ultimately eats into your interest earnings.

 

Key takeaways

Saving money in a bank, like any other investment of your hard-earned cash, has its pros and cons. On the plus side, it’s a relatively safe way to store your money, given that most banks are member clients of insurers like the FDIC and FSCS. Money in a current or savings account is also the handiest way to get cash on hand, given its high liquidity. Lastly, you earn interest on money stored in savings accounts. With that said, interest rates on savings accounts are generally lower vis a vis other investment vehicles, especially when you factor in inflation. You should also do your research on minimum balance requirements, which vary from bank to bank. Overall, identify what your goal is with a savings account and assess which provider you wish to continue with accordingly, if any. 

Disclaimer:

This material has been distributed for informational and educational purposes only and the opinions expressed represent the views of the author and not necessarily those of Wahed Invest LLC or any of its affiliates, directors or personnel (“Wahed”).  Any assessment of the market environment as of the date of publication is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice. Wahed assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. Any strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security.

Furthermore, the information presented may not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented.

Any links to third-party websites are provided strictly as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites nor do we endorse the content and information contained on those sites. When you access one of these websites, you are leaving our website and assume total responsibility and risk for your use of the third-party websites.

Other Articles

Employee Spotlight: Zayan Yassin- VP Business Operations

Employee Spotlight: Zayan Yassin- VP Business Operations

“Wahed is the place and opportunity for you to make a difference. Nothing beats the satisfaction of working with like-minded people who share a common goal and drive, to make an impact with everything we do. A growing company backed by real talents.”
What is market volatility and why should you care?

What is market volatility and why should you care?

The stock market has been very “volatile” throughout the year 2022. During the early stages of COVID-19, the stock market was "volatile.” Haven't we all heard the term "volatile" too many times in stock market discussions or market commentaries? But what does it actually mean in this context? Let’s find out. Basically, “volatility” occurs when stock markets experience frequent and unpredictable price movements, either up or down. A more technical definition is that volatility is the standard deviation of a stock's annualized returns over a given period and indicates the range within which its price can rise or fall. To simplify, a stock is said to have high volatility if its price fluctuates rapidly in a short period.Factors such as political and economic conditions, company performance, earnings reports, and interest rate decisions can all contribute to market volatility.
How do banks make money?

How do banks make money?

Banks, like any other profit-driven business, issue charges for the services and products they offer. These services primarily entail accepting deposits. Deposits are funds that people place in the bank with the understanding that they can withdraw them at any time or at a predetermined future date. But what do banks do with all of the money they receive as deposits? Here’s where a lending system comes into play. A significant amount of money the bank receives in terms of deposits is lent to other people. Loans are borrowed for homes, automobile purchases, education or personal requirements. Banks also provide loans to businesses that are looking for capital. While deposits and loans only play a small role in the overall banking game, the vital business of most banks is when interest is earned through this exchange. Profits start rolling in from interest earned by the banks!

Start your journey to wealth

Download the App now