There are many different financial accounts out there that you can use to accomplish both big and small goals. It can be confusing to decide on the right place to put your dollars because of it.
A savings account is one option you have available, but it’s not the ideal choice for all situations, because savings accounts tend to provide a low return on investment and your money isn’t always immediately accessible. Still, there are times when using a savings account makes a lot of sense.
In fact, financial expert Dave Ramsey has recommended two situations when your money should be in savings. Here’s what they are.
1. When you’re saving up an emergency fund
Ramsey recommends that you have an emergency fund at all times. This includes a small “starter” emergency fund with $1,000 in it when you are still working on repaying debt. And once you’ve become debt free, he suggests you have an emergency fund with three to six months of living expenses in it.
He believes that both your starter emergency fund and your larger emergency fund should be kept in a savings account. “That way your money is nearby if you need it but not so close you might accidentally spend it (like if you kept it in your checking account),” the Ramsey Solutions blog reads.
2. When you haven’t yet chosen an investment strategy
Although Ramsey believes that savings accounts serve an important purpose, he also warns that they are not an ideal place for long-term investing when you are saving for your future.
“This type of savings account isn’t meant to replace your investing accounts long term,” according to the Ramsey Solution blog. “The goal is to invest 15% of your income for retirement in accounts where you can earn way higher returns on your investment than in a traditional or high-yield savings account.”
However, he does suggest that a savings account may be a good resting place for money that you eventually plan to invest if you haven’t yet decided on exactly what investments you’ll eventually buy with the funds.
“If you haven’t met with a financial advisor to determine your best investment options, a high-yield savings account is a good alternative to hold your funds until you’ve selected the accounts to invest in,” according to Ramsey.
Is Ramsey right?
Dave Ramsey’s advice about when to put money into savings is financially sound advice. If you have money that you have set aside for emergencies, you don’t want to tie it up in an investment like a Certificate of Deposit (CD) that would prevent you from accessing the money when you need it without incurring fees. You also don’t want to invest it because there’s a chance your investments could be down when you need it, and thus you’d have to sell at a loss instead of being able to leave your money alone and wait for recovery.
It’s also a good idea not to rush into investing if you don’t have a strategy in place, as you risk losing your money. You don’t necessarily need to meet with a financial advisor to develop a plan before investing your money, but you do need to think things through about what assets to buy and may want to keep your money in savings while you complete that process.
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