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.
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.
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