Is Your Nest Egg at Risk? How Idle Savings Can Erode Your Wealth

You work for your money—and whatever you have left after paying the bills each month should work for you. Unfortunately, far too many of us just let our savings degrade. Not only do we earn next to no interest on them, but we allow inflation to erode their value year after year. Here are some smarter alternatives.

How Inflation Hurts

A recent Vanguard study found that “57% of survey respondents report that their savings are earning less than 3% interest, including 24% earning less than 1%.” Typically, that means the money is sitting in a regular old savings or checking account at a bank.

What to Save, and Where

 So what’s a better way?

Rachel Elson, a certified financial planner with Perigon Wealth Management in San Francisco, recommends that clients start by saving the equivalent of three to six months of expenses in a checking or savings account. That’s their emergency reserve.

She suggests a high-yield savings account with Federal Deposit Insurance Corporation (FDIC) coverage for spending beyond a month or two. These accounts, often found at online banks, recently paid more than 4% in some cases, compared with an anemic average of 0.41% for savings accounts in general.

Alternatively, a money market account, which is a hybrid between a checking and a savings account, often has a higher annual percentage yield (APY) than standard savings accounts. That means you could make easy withdrawals through checks, but you would likely get a lower return than on a high-yield savings account.

After that, it depends on the goals you might have for your money, Elson says. Leaving the cash in the high-yield account might make sense if it’s earmarked for a goal that’s no more than 18 months out, like a vacation. It isn’t going to lose money—unlike, say, the stock market, which historically does well in the long haul but could easily lose value over any 18-month period.

Investing for the Long Term

For the long term, a stock market index fund or exchange-traded fund (ETF) could be a good option. Other possibilities, Elson says, include increasing your contributions to your 401(k) or Health Savings Account (HSA) if you have one at work or funding a Roth individual retirement account (IRA) on your own.

Roth IRAs have the added advantage that you can take your contributions (but not their earnings) out at any time, tax-free and for any purpose. While it’s typically best to leave the money untouched until you eventually retire, it’s nice to know that it’s accessible in the meantime if you happen to need it.

The Bottom Line 

You have many options for your savings that will reward you more generously than a traditional bank account. The important thing, Elson says, is to consider your goals. “You want to know what your money is working toward,” she adds, “and to make sure it’s deployed in a useful way.”