The Dangers of a Growing Bank Account

by Adam on May 21, 2010

How’s your saving rate?

If you have been reading Magical Penny for a while I hope you have begun to grow your savings. If you have, then well done! However you still need to be careful you don’t start rationalising the idea of spending those savings as it’s all too easy to do!

Once you begin saving for the long term and investing it can be tempting to see your account balances as simply an extension of your normal short term savings and current account.

You may even start thinking things like:

“I could use my investments to buy a house”

“I could use my investments to go on a Caribbean holiday –it would be a great investment…for my sanity”

“I could sell my investments if I ever lost my job”

Depending on your perspective these could all be quite reasonable assumptions. However this can also be dangerous thinking that stops you from truly growing your pennies consistently over the long term:

State of Flux

When you invest you convert money into something else and whilst your investments are still part of your ‘networth’ their value is in a state of flux and can’t be relied upon like a savings account.

Having plenty of investments certainly is a cushion from financial disaster but it shouldn’t be your main strategy to prepare yourself for the worse. Your investments may not be worth what you need if you need to sell in a hurry. Instead, listen to the rallying cry of the personal finance blogger: “keep cash around”.

Losing Momentum

You may feel you’ll invest for a little while and then cash out when you’re ready to buy a house or other  big purchase. This can certainly be a good strategy for some and has allowed a friend of mine to buy a bigger house than they otherwise could have afforded. However, if you are serious about saving for the long-term and not just saving for what might come around the corner, you should not be cashing out your investments entirely.

You may feel you could use the money to help you achieve more pressing goals but you run the risk of losing the psychological game of your ‘saving momentum’.  What I mean by this is that no one enjoys starting again at £0. It might even discourage you from starting saving again.

By all means save for multiple goals but keep some of your investments separate in your mind –consider your ‘long-term’ savings ‘untouchable’ and it will help you keep your ‘saving momentum’ -it certainly helps me to I know I have some pennies invested that I will not be touching for decades. It helps me stay focused.

Human Beings aren’t good with big numbers!

Another danger of a growing savings balance is that humans aren’t really good with numbers.

For example if you had to imagine what a million tennis balls looked like you would probably do a bad job at estimating what they would look like.

The same idea is true when it comes to bank accounts and money in general.

As the numbers grow in your accounts and investments there is a risk that each penny become less meaningful to you: Either you stop giving your savings the attention they deserve or worse: you may think you can afford to take an increasing amount of money out of your savings or investments because as your savings grow, a small withdrawal becomes less and less as a percentage of the total balance. Don’t lose perspective on your money.

To sum up:

You may think an increasing bank account isn’t a problem (or it’s a nice problem to have) but alas the human mind can play tricks on your perspective and you may forget how hard it was to grow those pennies in the first place and for most people, it’s all too easy to spend.

For  most of us in our 20s and 30s, our savings and investments are pretty minimal at the moment but I hope you’ll keep these dangers in mind as you begin growing your savings for your long-term plans.

{ 2 comments… read them below or add one }

Personal finance

Very well written post. I liked the point where you stretch about ‘ saving momentum ‘. One’s it is lost, its quite difficult to start again. Therefore being on your toes is very important and need to know the difference between short term and long term investment gains.

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