I have a moderate amount of cash in the bank. I don’t need to use it for the next few years, should I save money in a bank or invest online?
Ahhh, that classic question! There is, of course, no such thing as a single correct answer! The best we can do is use data from the last few years to make a more informed decision for the future. To help you, I’m going to give you some practical examples to compare and contrast three different ways to save:
- A standard bank savings account.
- A Certificate of Deposit (also called a CD).
- Investing using a Robo Advisor called WiseBanyan. Without further ado, let’s see if it’s better to save money in a bank or invest online:
Before I dazzle you with some easy to consume math, let’s establish some fundamentals. Let’s call the fictional subject of this case study Jane. The year is early 2013. Jane is in her late 20’s, did an awesome job paying off student debt, doesn’t have much credit card debt and has a bank balance over and above her emergency fund of $12,000. Well done Jane! Jane is planning to take a travel year in her mid-30’s and wants to financially plan for that. Although she may save up more money over the next five years, she wants to maximize the money she has saved today. What should she do?
Jane has 3 obvious options. She could:
- Find a bank with a good ‘high’ interest savings account and have the discipline to keep it there for five years.
- Deposit her money into a five-year Certificate of Deposit, locking in both her money and an interest rate guarantee with that.
- Make use of one of those ‘new-fangled’ robo advisors to invest her money automatically.
You have a big advantage over Jane as I’ve crunched the historical numbers for all three options and can share with you what her outcome would have been for each.
High-Interest Savings Account
So most people have checking accounts and automatically, an accompanying savings account. You would guess that the savings account will have higher interest than your checking, right? That is correct but what most people don’t know is that the American average interest rate for the last 5 years has been 0.06%. Nope, that isn’t a typo, that’s significantly less than one-tenth of one percent! Using the average % as a guide (and Jane’s $12k deposit) can you guess how Jane did over the five years with the safe bank option? Let’s find out:
It’s difficult to find the words to express how inefficient this way is to save. Over five years, Jane’s pot has grown $38.45 (!) which means she has only grown her gap year fund by 0.32% However, in the interest of fairness we should say that as pretty much all bank deposits of this scale are federally insured, there was almost zero risk in this option. Almost zero reward, but almost zero risk.
Five-Year Certificate of Deposit
C’mon banks, surely you can do better than that! Well, yes they can. Pretty much all banks offer a product called a certificate of deposit (or CD for short). Most CDs are essentially a deal to lock your money up for a period of time, in return for a guaranteed interest rate. For most CD’s, you lose control of the money for the agreed-on time period but get better interest rates. The longer the ‘lock-in’ period (and the higher the deposit value), the larger the interest rate. And thanks to our friends at Bankrate.com, we know what the average CD %’s have been in the US for the last five years. To the calculators people!
So now we see the difference between a ‘normal’ savings account and a CD. Jane would have gained $549.81 over the last 5 years, a net % gain of 4.58%. The other great factor about a CD, like the savings account example, pretty much all banks and credit unions are federally insured. Therefore, as long as you take the CD out at an insured institution, this option would be almost zero risk. Also, unlike the savings interest rate which will fluctuate over time, the CD interest rate is locked.
The one single downside, you cannot easily get access to your money during the agreed upon time period.
Robo Advisor – WiseBanyan
Jane’s final option was to use a robo advisor like WiseBanyan. WiseBanyan, like most robo advisors, automates investing in stocks and bonds using sophisticated computer algorithms. You put money in, trust in the robots and hope to see greater returns than traditional savings methods (CD’s etc). As with any investment in stocks and bonds, you can lose money but by using robo advisors, you don’t have to be an expert to participate. You deposit money, tell the robo advisor your risk profile and let the robo do its job.
We have selected WiseBanyan due to its zero fee model (for situations like Jane’s) and as it’s incredibly simple for newbies like Jane to create an account and get moving. Thankfully, as WiseBanyan has been in operation since 2013, our friends at Senzu has performance data going back five years. It’s time to create our final table!
Can you see the difference? Over the last 5 years, WiseBanyan pulled in $7,278.20 with a growth rate of 61%! We at Wealth-Hack love to talk about compound interest, this is a combination of that and a healthy stock market combining! We should say 2 things to give context for this.
The stock market has gone through a fairly healthy growth period over the last few years, out of the 5 years, only 1 year had a slight (WiseBanyan fund) decline. Also, the WiseBanyan returns are based on a risk profile that favored higher returns over consistent return. You would expect in good years to have higher returns but could see bigger swings in negative years.
However, you can clearly see the difference in outcome compared to the more safer, bank backed saving accounts. The other advantage compared to CD’s, your money is more accessible. If after two years Jane decided to cash out to fund a deposit on a house, this could be achieved within a matter of days.
Should I use my savings with a robo advisor like WiseBanyan?
An almost impossible question to answer definitively as all circumstances are unique but let me take you through some of the questions you should ask yourself.
The first consideration is your time frame. Are you looking to generate returns on a short-term time period? That being the case, a short-term CD seems more appropriate. It is absolutely possible to make returns on the likes of a WiseBanyan over the short-term. However, as the stock market can be volatile, you can end up with taking a hit quickly and needing to back out at a loss. However, if like Jane your time frame is years, both CDs and robo investing are options that could be considered.
What am I saving for?
Are you saving for a rainy day? For a specific definitive purpose or to do something optional, and nice? If you are storing cash for an upcoming life-changing event that is more than a few months away (getting married, first home deposit), investigate making use of this cash within a CD. Investing for these goals using a robo advisor would be risky as, if the market heads the wrong way quickly, you could have jeopardized a major, life-changing event. Not cool!
If you, however, would like to experiment in the stock market, supplement existing long-term retirement savings or find a route to allow compound interest to grow, robo advisors like WiseBanyan are a great option to start that journey.
As a final but important aside, if you are considering robo advisors, remember that they are best deployed long term. If you are the type of person who will check on your holdings multiple times a day or stress on every small downturn, think hard before investing. This type of platform is not ideal for people who hope to time the market.
So what do you think? Do you have mid/long-term goals that could do with a financial power-up? Could WiseBanyan help? Or are you now in the market for a CD? If you want to have a play with a robo yourself, please click any of the WiseBanyan links within this post.
We have also published a ‘how to invest using WiseBanyan article which gives more detailed hints and tips on how to make WiseBanyan work for you. Click here for more or comment below to get engaged on this game-changing topic.
* A few things. To keep this simple, we have taken tax out of the equation. We’ll deal with that in a separate post. Also, 2017 full year results have been derived from first 6 months actual growth %’s. I’m not Nostradamus!:)
|James Burns. Founder @ Wealth-Hack|
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