by Dave Coker

Created on: June 25, 2008

All right! By working hard and keeping an eye on costs, you've been able to save up some money. There's a significant sum of money in your bank account - good going!

But as difficult as it was to save that money now comes the really hard part - what to do with it? Where should you put your hard earned cash? Are you better off putting your money in the stock market or the bank?

Great questions. Let's look briefly at some of the pro's and con's of each and try to figure out the answer.

MONEY IN THE BANK

Let's first look at the pro's of keeping your money in the bank.

Well, we've all heard the old expression "as safe as money in the bank" and that's the big plus of a bank - they are safe. Short of a collapse (more on that in a second), your money is safe and earns interest. If you deposit $100 in the bank today, tomorrow you'll have $100 and next week you'll have $100 and, depending upon the details of this account, at some point in the future you'll have more than $100. That's certain.

And in terms of a collapse, in the United States the first $100,000 in each account is protected by the Federal Deposit Insurance Corporation, or FDIC. The FDIC was created by the United States Government in 1933, after many banks collapsed during The Great Depression. If your bank collapses the United States Federal Government guarantees the safety of your money.

So banks are certain.

But there must be con's to keeping money in the bank - and there are.

First of all, inflation.

The value of money is eroded by inflation. The rate of interest earned on cash in the bank almost never exceeds the rate of inflation. This means over a sufficiently long period of time, one actually loses value - purchasing power - by keeping money in the bank.

A second con is a slower growth rate than what's offered by other investments. For example, the long run rate of return on the stock market is generally acknowledged to be about 7%. Few bank accounts offer an interest rate of 7%, meaning by seeking out the safety of cash one is forgoing higher rates of return.

A third con is taxes. Deposit $100 in the bank for one year at 3% interest and in twelve months you'll have (assuming simple interest) $103. In other words you've earned $3 - you're wealth is growing! But you don't really have 3$, as taxes are payable on interest earned (while taxes may not be payable depending upon many factors, such as your overall income, interest on savings is generally taxable).

So we see that money in the bank, while attractive

• 1
• 2
• Next Page >>