When saving money, one has a few options when it comes to where to put the money. Maybe the most usual place to put money while saving is in a bank account. While bank accounts have their pros, this article intends to expound on what alternative there are to normal savings accounts.

Pros and cons of putting money in a bank account

When putting money in a bank account offers a certain kind of safety compared to putting the money in a mattress for example. The money in a bank account is often easily accessible, meanwhile, it is usually very hard for outsiders to get access to the money. However, the crux is that when money is stored away in a bank account it just sits there, at the same time as the real value of the money in the account depreciates. This is because of inflation, meaning that everything gets more expensive by the day. This leads the relative value of money put into the account to become lower at the time of withdrawal. To make up for this value loss, banks usually offer interest on money deposited in a bank account. However, in normal savings accounts, this interest is often lower than the inflation. Below is a clarifying example of this:

Inflation in an economy: 3%
Interest offered by bank: 2%
Real value of money at withdrawal: -1% (2-3)

So according to the above example, in an economy where there is 3% inflation and a bank offers 2% interest, one’s money depreciates with 1%.

Certificate of deposit accounts

There are ways around this. Often times banks offer higher interest rates when money is deposited for an agreed upon period of time. For example, if one wants to deposit money for 6 months there are certain accounts that offer higher interest, however, the money put in that account can not be accessed during this 6 month period. This is a type of account called certificate of deposit (CD). CD’s may come in different terms such as 3-, 6-, or 12 months. ^[1]

Conclusion

When saving, there are many options where to put one’s money, and usually there are often better options than putting money in a normal savings account. For example, CD’s pay a fixed interest rate on money held for an agreed upon period of time. Any form of saving that gives a return above the inflation rate ensures an increase in the real value of money.

Sources

[1] Fernando, J. (2024) What is a certificate of deposit (CD)? Pros and cons. Retrieved from: https://www.investopedia.com/terms/c/certificateofdeposit.asp (accessed: 15 Sep 2024).