I would like to share a story about why it doesn’t make much sense to keep all of your money in a bank account. Disclaimer: Having a bank account is very important. As a rule of thumb, having 3-6 months of savings (6-12 months is even better) in a bank or credit union is appropriate, but anything over that doesn’t make much sense.
During a previous job, I was an avid commuter. Every weekday I would take the train to and from work. On several occasions, I would notice that while passing through the turnstiles at the station, there was always spare change on the ground. Pennies were the most plentiful, but even on a few occasions I found $1 coins and even paper money. If I had to pay for an additional fare or replace my train ticket, I would typically find spare change near the machine. What started out as a simple observation, turned into an obsession. Each day as I passed through the train stations, my eyes were transfixed on the ground, scanning for any signs of free money. My obsession took an even bigger turn, because after a week of doing this, I setup an excel spreadsheet to track my earnings. This adventure went on for nearly 2 whole years!
So what exactly is the point of my experiment? During the first year, I collected nearly $30 (this total excluded the paper money found) off the ground at the train stations. And I’m sure you may have been thinking this while reading this article…yes, I carried hand sanitizer in my bag. That year, my bank only paid me $15 in interest from my savings account. The previous year my bank only paid $13 in interest from that same savings account.
Now the recommendation isn’t to become some spare change scavenger while you’re out in public, but from one (seemingly silly) experiment, I accumulated more money than what my financial institution was paying in interest for the past two years. This makes a very compelling argument for those people who are afraid of investing. Investing your money in the stock market or some other investment vehicle allows your money to work a little bit harder for you. Yes the stock market can be a frightening place (when you don’t understand it) but if you take a look at any historical data about the stock market, you will see some magical things have happened over the long haul. And yes, if you analyze the stock market in certain time frames, it would scare the boogie man. However, investing is a really good thing that everyone should do and the longer time horizon you have for investing, the better.
Lastly, I heard many people express to me that there isn’t any risk when your money is in the bank. However, keeping all of your money in the bank makes you highly susceptible to purchasing power (inflation) risk. Just so you don’t forget, when it comes financial products, whether it’s banking or investing in the stock market, risk is ALWAYS involved.