Can You Lose the Money in your Savings Account?
Many people believe that investing money in a bank account is the wisest and safest method to do it. There are occasions when this makes sense but you should avoid ways that will lead you to lose the money in your savings account.
Storing large amounts of money in your savings account over time may even lead to a loss in the value of your savings.
To calm your nerves somewhat, all banks, building societies, and credit unions that are regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are covered by the Financial Services Compensation Scheme (FSCS) (FCA). This is a comfortable guarantee that you won’t physically lose the money in your savings account.
There are eligibility requirements, but most normal people like us are typically protected.
This article will go over some important considerations:
- How does leaving money in a savings account cause you to lose money?
- What is inflation?
- Suggestions for how to use a savings account effectively
- What could you use instead of a savings account?
Can you Lose the Money in Your Savings Account?
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In a nutshell, you are almost certainly losing money in your savings account right now.
If you keep your money in a savings or bank account, you will lose money that way simply due to inflation.
Stocks and shares or a range of other financial assets provide a larger level of interest than inflation, allowing your investment to increase rapidly.
This is not to say that checking or savings balances do not have a role in an overall investment plan; they do.
You can get both, but as this post will describe in more detail later, you must integrate both into your strategy as efficiently as possible.
A savings account is an important tool for budgeting. It will allow you to save enough for crises and allocation of resources necessary, and you may even earn some money in the process. However, not all savings accounts have been created equal.
Some have exorbitant rates…
Others are just bad in general.
How Does a Saving Account Cause You to Lose Money?
Inflation takes its toll on your savings account, but what exactly is inflation?
Almost every time you’ve heard the phrase inflation, it has resulted in a bad outcome for your money saved in your bank account.
Have you ever heard your grandparents talk about how a packet of chewing gum used to cost less than a penny and nowadays it can be anywhere up to a pound!
Don’t even get me started on Freddos!
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This is all a result of something called inflation.
What is Inflation?
Investopedia defines inflation as
Inflation is the decline of purchasing power of a given currency over time.The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
What you should understand is that inflation is typically approximately 2% annually.
Or at least it is targeted at 2%, it doesn’t always hit that target as we are seeing at the time of writing this article!
But in short, if you spent £1 on a general purchase in one year, the next year it will be £1.02, representing a 2% rise.
That may seem small but it certainly adds up year on year, and when we start talking big numbers that will be a significant hit.
But how would that impact your savings account?
When banking rates of interest are below the level of inflation, keeping your savings in a low-interest account means you’re missing out on chances, the opportunity cost.
When the cost of items rises faster than the pace at which your money increases, your savings drop in value and you are theoretically making a real loss of your wealth.
Suggestions for Using a Savings Account
If you are using savings accounts for simple goals, they may be quite useful in your investing strategy. Targets like as:
- Purchasing a home
- Purchasing a vehicle
- Putting money aside for a trip
- Putting money aside for a significant purchase that you need soon
- Your emergency fund
Because these are objectives you’ll be spending on within the next 6-18 months, inflation won’t have as much of an impact.
Furthermore, your regular deposits into this fund will make inflation appear to be basically non-existent and then you won’t lose the money in your savings account in that way.
In the Long Run, What Could You use Instead of a Savings Account?
If you are saving for the longer term, especially for any amount of money you won’t be needing for over five years in the future then investing in other financial assets would be a great option to avoid inflation eating away at your nest egg.
There is a significant distinction between investment and savings.
However, outside of the financial world, the terms are generally used interchangeably. The distinction is that saving is for the near term, as we’ve just mentioned, but investing is for the long run.
It’s generally a good idea to have a year’s worth of money in savings as an emergency backup or what’s known as an emergency fund.
Since life is pretty unpredictable for the most part, it isn’t a bad idea to have some cash on hand. Anything other than that, on the other hand, might lose you significant amounts of money in long-term development.
You have to strike a balance to not lose the money in your savings account.
Bottom line
So to answer the question:
Can you lose the money in your savings account?
If you are saving money in a reputable bank that is covered by FSCS – the Financial Services Compensation Services then you would actually lose the nominal amount of money in your bank, it will be insured.
Yes, over a considerable length of time, a savings account can run out of cash.
Even though you might have the same nominal amount of currency, its buying value has dwindled, and there is nothing we can really do about it.
Inflation is only really a positive thing whenever it is controlled and for those who are borrowing money, it is the silent mortal enemy of savers.
The fact is some level of inflation is a reality of life and it’s not going away anywhere anytime soon so it’s best to prepare for it and avoid the main way you lose the money in your savings account.