Did you ever have a piggy bank as a child? How wonderful was the feeling of shaking the piggy bank and knowing it was filled up! But if you would have let that feeling of satisfaction stop you from ever breaking the piggy bank to utilise the money, the entire savings activity would have been futile, to begin with.
Your savings bank account is much like the adult version of a piggy bank. ItтАЩs good to see a high balance but donтАЩt let that fool you into thinking youтАЩre closer to your financial goals. As a popular adage of economics goes – Money is what money does. Sitting there in your bank account, unfortunately, money doesnтАЩt do much. The more money you have in your savings account, the farther you are from using your wealth to build your wealth further.
What is the ideal amount to have in my savings account?
Beyond a certain amount, you shouldnтАЩt just leave your money in your savings account. That amount depends on your income, expenses, and lifestyle. As a rule of thumb, you should only keep an amount equal to 6 months of your expenses in your savings account. ThatтАЩs known as an emergency fund. ItтАЩs essential to have your emergency fund be liquid so that you can access it whenever required.
Even with your emergency fund, itтАЩs better to utilise the fixed deposit facility over your savings account. This is because the rate of interest is higher in fixed deposits and they too offer high liquidity and instant access.
People who are a little more financially conservative may have 12 months worth of expenses as their emergency fund. While some others may have an emergency fund only for 3 months of their expenses. This is a personal decision and should be made according to your comfort level. However, anything beyond 12 months of expenses in your savings account will actively harm your financial health.
Things go wrong with too much money lying around
Two things happen when you have more money than required in your savings account. And both of them work against you.
- Negative real returns
The interest rate offered by banks on the savings account balance is between 2.5 to 4%, depending on the bank. This is a nominal rate. If you have Rs. 50,000 on average in your savings account, youтАЩll earn only Rs 2000 at a 4% interest rate annually. This, too, is an illusion of earning because it doesnтАЩt take into account the inflation rate.
Currently, the inflation rate in India is around 6%. So, taking that into account, youтАЩre earning negative real returns. Negative real returns are equal to your returns minus taxes and inflation. Due to inflation, the value of the money that youтАЩve kept in your bank account decreases over time since the returns you earn on it are not inflation-beating.
- Inclination to spend more
If you have more money in your bank than you need, you will subconsciously end up spending more than you need. It may build a false sense of security and excess. Your high savings account balance may constantly make you feel as though you can indulge in a range of unnecessary discretionary expenses.
You may not think twice before buying all the items on your Amazon wishlist, you may look at the electronics you own and be tempted to upgrade them, and you may constantly come up with reasons to spend more money. So, itтАЩs best to protect yourself from this behavioural pitfall and let your mind believe that you donтАЩt have access to additional funds.
What can I do with the additional money instead of leaving it in my savings account?
Make your money work for you! Most people are so used to working to earn money, they donтАЩt realise that they can make their money work for them too. The way to do this is by financial planning and investing.
Savings is only the first step of financial planning. You need to figure out what your short-term and long-term goals are and how you can invest in different assets to meet them. Investing in equity, gold, real estate, ETFs, and more can help you build a balanced investment portfolio and grow your money.
When you make some strategic investment decisions, your money begins to work for you round the clock. So, even when youтАЩre sleeping or on vacation, your money keeps working to make you more money. ThatтАЩs the beauty of investing and compounding. And also the reason why you shouldnтАЩt just leave all your money lying around in your savings account.┬аLearn more about savings, trading, financial planning, investments; and start savings and investing in global equities at the click of a button with Appreciate Wealth. Simply log on to the Appreciate Trading app┬аand join the waitlist to learn more. Sign up now!
