Skip the Savings

Only recently have traditional savings accounts started paying respectable interest again. For many years, a savings account paid almost nothing! It is in the super saver’s nature to get the best return on every dime. Many years ago, my wife and I chose to close out our savings account. We maintain only a checking account for day-to-day spending and a taxable investment account to serve as our “savings”.

A byproduct of living frugally is developing a surplus in your checking account. This small checking surplus is what we use for immediate emergency expenses such as a car repair or other unforeseen needs. Once the surplus reaches a certain level though, we invest the extra into a short term, taxable investment account.

For the short-term taxable account in lieu of savings account strategy, one must consider quite a bit. First and foremost, how much risk are you willing to accept? The worst-case scenario is to need access to funds and the account value is running low due to a dip in the market. For this reason, consider a more conservative or moderate mix of investments. A couple of good income producing bond funds, dividend paying stock funds and positions weighted in certain commodities are some possible options. Another possibility is a target fund set at a target about 10 years out.

We kept about a 70/30 split between low-risk positions and moderate risk positions, but that is us. If uncomfortable with taking moderate risk in a short-term investment account, seek less risky positions! On a positive note, even the most modest low risk funds can often return around 4% a year. A heck of a lot better than many savings accounts!

It’s probably important to define “short term” here. The goal is to not tap this investment account for routine or even unanticipated expenses but rather use the funds every 3 to 5 years for the big, usually foreseeable expenditures in life. This could include the down payment on a home, a new car, home repairs, new furniture or perhaps emerging child expenses.  

Regarding unforeseen or emergency expenses, a key point to remember about using an investment account as “savings” is that it could take about a week to access funds after a sell. This is all the more reason, to keep that cushion in a checking account to cover immediate emergency expenses until able to tap the short-term investment account if absolutely necessary.  

The second important item to consider about the short term, taxable investment account is fees Ideally, for the short-term account, seek mutual funds or other investments that don’t include front or back-end loads as well as minimal annual operating fees. Pay attention and do the research on commissions and trade fees. There are a lot of big investment companies out there that have several quality investment products with reasonable fees.

Conveniently, these investment accounts can often be managed completely online. Everything from linking an investment account to checking accounts, automatic investments, re-balances and trades can usually be completed easily with a few clicks of the mouse! Account fees are another reason one should only access these funds when absolutely necessary as frequent trades will run up expenses which cuts into return on investment.

Lastly, when selecting positions for a short-term investment account, one must consider tax implications. I say “consider” because that is really all you can do; be aware that income from these taxable accounts must be reported. Paying taxes is one of only two certainties in life, death being the other one. Taxes are not entirely bad. Owing taxes on an investment account means you are making gains!

At age 23 I opened a taxable investment account with a single mutual fund position and began my journey as a super saver. I started about five years too late in my estimation. My account grew steadily and compounded quickly as I regularly increased monthly contributions commensurate with pay raises. Long story short, proceeds from that single fund (my “savings”) served as the seed for our first home purchase at age 35, initial investment for a long term (retirement) investment account and helped with big family expenses for several years. Skip the savings, make every hard-earned dollar work as hard as it can!

Looking for a good how-to on wealth building? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truth’s to Build Wealth on sale now at Amazon!

Interested in rental property investing? Look for Collect Rent, Don’t Pay It: A Beginner’s Guide to Rental Property Investing on Amazon to learn how our family turned rental property investing into a successful side hustle!

Look for, Being Frugal, a Truth to Build Wealth, coming to Amazon in early 2025!

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