Investing Myth 1 | The Savings Account Myth | A Savings ‘Emergency’ account is the best way to save.
First up in our seven series work on the Investing myths: The Savings Account Myth: A Savings ‘Emergency’ account is the best way to save.
THE SAVINGS MYTHA Savings Emergency vs A Savings Investment Account. Click To Tweet
How do you save money?
Is it in a savings account which is then used for an emergency?
And when the need arises, you just ‘spend’ on that urgency?
No, do not even call that a savings ‘investment’ account.
Saving money in a savings ‘emergency’ account is not saving smartly. This is because a Savings account from that perspective for most people is just an emergency fund.
When people say that they save through their savings account, it simply means, they have an emergency account.
But to save smartly, you should make it a habit of having a savings account as an “Investment” account.
You need an investment account to save smartly.
There is a world of difference between saving as an emergency and saving for Investing.
A savings ’emergency’ account most times is accessed to cater to an emergency.
Say a broken phone, a spoilt bathtub, worn-out tyres and something of that sort.
Truth is, when any of the above ‘emergency’ or unplanned expenditure happens, the natural thing to do is to go to the savings ‘emergency’ account and swoosh, take the money out. Yet, we promised ourselves that we wont ever touch that money, unless it is to be invested.
We even go to the extreme of having a savings ‘emergency’ account in another bank without an SMS alert nor an ATM card. Still yet, when the ‘emergency’ comes, we give in. Suddenly, the winds of circumstances and the storms of necessities blow. And, we are swept by the urgency of an emergency. The fact that the money was spent not invested, makes it a savings ‘emergency’ fund.
Thou shall not be tempted to spend thy savings!
INVEST NOT SPEND
A savings ‘investment’ account should not be available to answer the clarion call of a broken screen. Irrespective of the urgency. You live with it, period. Bear the pain so you can make the gains. Ignore what people say or how they make you feel.
Pay Now and Play Later!
Someone quipped ‘In Order to Make a Million dollars, you must bear a Million Dollar Pain’.
The savings ‘investment’ account is supposed to be used to make investments. Plain and Simple.
The fact that you have a savings ‘emergency’ account means you won’t be disciplined enough to earmark that money for an investment when the need arises.
Now imagine that just after you had fixed that screen with the money in the savings account, an investment opportunity comes up. Well, simply put, you miss an opportunity to grow wealthier, altogether.
PLay NOw, Pay Later!
If you spend your savings account, it is an emergency account
If you Invest your savings account, it is an Investment Account.
The other advantage of an investment account which is not popular in Africa is that it earns what is termed as the risk-free rate of return. Most savings ’emergency’ accounts in Nigeria earn between 3-5% yearly. However, the risk-free (Central Bank) rate is more than two times that amount. With a Savings ‘Investment’ account, your money earns a rate of return that is fairly above inflation.
If you have a savings account with a local bank, you might understand my logic. Leaving money in the bank is not the way to have a savings ‘investment’ account. Inflation and bank charges would erode the value like rats bite and blow air on your leg.
In Nigeria, for instance, banks are mandated to pay just 1/3 of the MPR-the Central Bank Rate- for savings account holders. This means you could earn at least two and half times more if you have an account that earns you the MPR rate.
What’s more, if you withdraw more than four times in the account in a mount, you forfeit the interest. You would agree with me hence that most savings accounts are ‘spending’ or ’emergency’ accounts in disguise. Zero returns.
A good way to maximise the earning of a risk-free (MPR) rate of return while having the flexibility of a ‘savings’ Investment account is a money market fund. With a money market fund, money earns the risk-free rate while there is flexibility in withdrawal to deploy capital to more risk adjusted returns on short notice.
Therefore, if you want to save smartly, do not put money in a savings ‘emergency’ account earning below the rate of inflation. Have a savings ‘Investment’ Account whose sole objective is the accumulation of wealth by capitalizing on an opportunity when it does arise.
Would you Step out of the Savings Myth?
4 min read.