The Myth of the Underperforming Savings Account
By: G M Potter
Tags: Self Improvement, Financial Planning, Investing, Saving Money, Life Lessons

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Often in life, we come across common knowledge that is, upon scrutiny, simply wrong. For example, common knowledge says that savings accounts are a waste of time, or they don’t earn enough to commit any dollars to them. This is common wisdom that, it turns out, is very misleading.

Theoretically, the common knowledge is right. In reality, it ignores a fundamental behavior that no one likes to talk about because most of us are guilty of it all the time.

Your savings account can earn a return that rivals the best day on the stock market.

There are a few assumptions that need to be acknowledged to see how this statement is, in fact, factual. Let’s open up some hard data to see what is really going on instead of relying on theoretical “common knowledge.”

According to an article on CNN Money, in 2017, Americans paid nearly $12 billion in overdraft fees in 2016. Yes, that’s Billion with a B. The average overdraft fee was $24, and, on average, individual Americans paid $450 in 2016 for overdraft fees. (And, yes, I know it is 2020. Do you really think behavior has changed much in 4 years?)

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I really like statistics. I’m a numbers geek, I admit it. When I read such a broadly based statistic, the first question I will ask is this: If someone were above average in this respect, how much money do they waste each year? And, even if someone were below average, do they realize how much they waste?

How about you? How much did you waste last year?

It doesn’t need to be this way. Your bank offers plenty of ways to avoid this, which seems counter-intuitive to their motive of making money. They offer solutions and strategies, but few people take advantage of them. The banks know this about people, so it really isn’t counter-intuitive after all.

The average consumer bank offers checking and savings accounts to nearly anyone. In both accounts, there are maintenance fees associated with them. These fees can be negated if specified minimum balances in the accounts are maintained. For example, at Wells Fargo, if you open up an “Everyday Checking” account with a minimum deposit of $25, the account carries a $10 monthly service fee. You can avoid this fee if you set up direct deposit or maintain a minimum balance of $500. Easy enough. Just arrange a direct deposit from your employer, and the fee goes away.

Unfortunately, if you bounce a check, it will cost you $35 as an NSF fee. See CNN Money above.

For the savings account, the monthly service fee is $5 and can easily be avoided if a minimum of $300 is maintained in the account. Here is where having a savings account creates a strategic advantage. The savings account can be used as overdraft protection to avoid the overdraft fees.

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Still, think Savings accounts are a waste of time? Do the math that is based on reality, not theory.

Imagine for a moment that you are a customer of this bank (Wells Fargo is used here as an example only and does not reflect my opinion of this company in any way), and you have a checking account and a savings account. You consistently keep $400 in each as a minimum as a part of your overall financial discipline. You pay $0 in fees each year for both.

You are well below the average in terms of NSF fees paid annually in this country. Remember, the average is $450 per year that is paid by the average individual in overdraft charges at their bank.

Let’s refine the example further. If you are well below the average in this country, even without the discipline, you might average 3 NSF charges per year, for example. This totals up to be $72. This is the potential fee you are avoiding by having $400 in savings. Your savings account is, in effect, earning $72 per year for you because it allows you to avoid this charge.

Imagine if you were average according to the statistics. How much would $400 in a savings account really save you?

This is not a joke. It is an alternative that most people simply do not take part in either because they don’t pay enough attention to their money, or they simply can’t find a way to save $400. This is not a joke because if they could save $400, they would save, on a national average, $450 every year. But they can’t save this much because they are paying THAT much to their banks each year. A vicious cycle, to be sure.

There is a solution. There is a way to make your savings account earn as much as the stock market on a good year.

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This is, I admit, bordering on the hyperbolic, but there is a logic here if we stay in the realm of the realistic. Suppose that as an example, on average, you only pay one NSF fee per year and that fee is $30. If you had a savings account with $300 in it and overdraft protection set up with the bank, you would save that $30. In effect, your savings account would be earning you 10% because, in the absence of the account, this is what you would be losing.

So, how do you find $300 to set up this money-earning little sum?

There are many ways. You could do some extra paid work on the side until you make $300, which you promptly place in a savings account at your bank with overdraft protection. Or, you could sell something that you own, but you just don’t use anymore. Or, you could set up a systematic withdrawal from your checking account to be deposited into a savings account. This is a service that most banks have and can be as simple as transferring $1 for every transaction in your checking account. There are many more ways as well, and just because the savings account will not have $300 immediately doesn’t mean you can’t avoid NSF charges.

If investing and saving are things you are pursuing, focusing on a savings account that can save you good money, and in effect, earn a high rate of return, might be the first step you should take.