Rosalind Evans
A savings account is widely regarded as a secure haven to safeguard your money. Thanks to the Federal Deposit Insurance Corporation (FDIC), most banks are insured up to $250,000 per depositor, per bank. Consequently, even if your bank faces a fate similar to Lehman Brothers, Silicon Valley, or First Republic, your savings would still be insured up to that threshold.
However, despite the inherent safety of savings accounts, there are a few scenarios in which your funds could be jeopardized. It is crucial to be aware of these risks and take appropriate measures to protect yourself. Let’s explore three significant risks you should consider.
- The threat of account hacking Within a physical bank, money is stored in impenetrable vaults, as depicted in Hollywood heist movies. However, when it comes to online savings accounts, a mere username and password can potentially grant unauthorized access.
Fortunately, you do have certain safeguards in place. Federal law protects you from liability for unauthorized electronic transfers if you promptly report the fraud within 60 days of its appearance on a periodic statement.
On the flip side, failure to report the unauthorized activity within the specified time frame may render you liable. Thus, it is vital to monitor your financial accounts regularly. While 60 days should provide sufficient time to detect fraudulent activities, you can opt for additional security by signing up for account alerts, notifying you of transfers and other activities.
- The risk of stolen ATM cards Typically, savings accounts do not come with debit cards. However, some offer ATM-only cards, allowing you to withdraw money exclusively from your bank’s ATMs. These cards usually require a Personal Identification Number (PIN). Nevertheless, if both the PIN and the card are stolen, an individual would have access to your savings.
Again, you possess certain protections in such instances, contingent upon how promptly you report the missing or stolen ATM card.
To ensure full protection for your money, report the loss or theft of your ATM card as soon as you become aware of its absence.
- Potential risks of idle funds A savings account is an appropriate place to set aside money for emergencies and short-term savings goals, such as purchasing a house. However, if you accumulate a substantial sum for retirement or other long-term objectives, you may encounter another risk: forfeiting potential higher returns elsewhere, such as investing in the S&P 500.
At first glance, this may seem counterintuitive. After all, isn’t investing in the stock market riskier than keeping money in a bank?
Indeed, investing in stocks does entail the possibility of losing money. However, it is essential to recognize that leaving your funds in a savings account for extended periods can also carry risks, such as earning interest rates below inflation or inadequate growth to secure a comfortable retirement.
Historically, the S&P 500 has generated significantly higher returns than the interest earned in a savings account over long periods. For instance, between 2012 and 2021, the average annual stock market return for the S&P 500 stood at approximately 14.8%. In contrast, the typical Annual Percentage Yield (APY) on a savings account during the same period rarely exceeded 1%.
Nonetheless, investing in the stock market carries inherent risks. Therefore, it is crucial to maintain a cash reserve alongside your investments. In this context, savings accounts remain among the safest options to store your cash, as long as your bank is FDIC insured, and you take precautions against the aforementioned scenarios.
