Bank Savings Account

Bank Savings Account vs. High-Risk Investment

Before anyone chooses a mutual fund investment over a bank savings account – or vice versa – she should first determine his risk-aversity and his need for liquidity. If she is isn't risk averse and does not require liquidity, she may want to consider investing her money in a high risk, high return mutual fund. This takes the pressure off of her to manage the money herself, but also gives her the ability to earn significant dividends on her investment, as well as a constant real increase in her wealth. In contrast, if she is quite risk adverse and requires liquidity, she may want to stick to a bank savings account.

A bank savings account, depending on inflation rate and on the Federal funds rate, can actually be a mild, but reliable means of earning. In most cases, however, the nominal interest earned on a savings account just barely outpaces inflation. In some cases, the actual result is a net accounting loss if inflation outpaces the nominal interest rate, leading to a negative net real interest rate on the money in her bank savings account. Since most accounts currently offer an annual percentage yield of around 4 to 4.75%, the saver in question may be able to earn a real rate of around 2-3%, provided that inflation remains low enough. An economist, however, would say that – in this situation – the saver in question is experiencing a net loss on her capital, as she could be earning a higher yield on a similarly risk venture (i.e., a low risk mutual fund).

However, if liquidity is important for the saver in question, then a strictly yield-based analysis would not be optimal means of exegesis. If the saver cannot regularly withdraw and deposit funds, she may not want to use that means of earning at all – in which case, a bank savings account may actually be the optimal choice.