is my logic wrong here, like shouldnt any sane person then invest virtually all their money?
i suppose the main counterargument is that its safer in a bank, anyway im not too knowledgeable so i wanna hear what people have to say here
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The usual recommendation (after paying all debt) goes something along the lines of having:
- An account with immediately available funds for day-to-day expenses.
- An emergency fund in fiat that provides enough liquidity in the case of an emergency. This is usually at least a few months worth of salary.
- Everything else should be invested.
Any amount that is not invested is depreciated by inflation, so you are guaranteed to be losing money by “saving” money in a bank account. It makes sense to pay for the fluidity and safety of an emergency fund, but it does not make sense to save long term otherwise. At the very least, one should choose a low-risk investment vehicle that can match up to inflation. There are some low-risk ETFs worth looking into for the risk-averse saver.
Good in general, but one thing - it isn’t always a good financial decision to pay debt down. It depends on interest rates. If the bank/credit card/whatever is charging you less interest than you can make on investing, you should choose to invest instead.
Example 1 Credit card charging 20% and expected return on investment 5%. In this situation you should pay the debt.
Example 2 Mortgage at 3% and expected return on investment of 5%. Investing will net you 2% (5%-3%) a year more than paying off your loan.
Note that paying a loan is a guaranteed return while investing is a gamble, so you have to weigh that in personally.
This makes sense yeah. Im curious, does the bank rely on people having “too much” money in their bank? like more than the emergency fund? if everybody followed this advice, would the bank be in financial trouble?
I wouldn’t say they rely on it, but they do take advantage of it. Banks do many things to make money.
They are only actually required to have a certain percentage of the money they “have” on hand not being invested. This amount has constantly been shrinking in the US, and was actually reduced to zero with a lot of asterisks during the beginning of the Covid pandemic.
Realistically, if there was a decrease in the amount of money people were saving rather than investing and it was negatively effecting their business they would just have the reserve requirements lowered even more.
The main function of the banks is to give out loans. All other functions are only there to assist in this main function.
There are always a risk of losing money for either loaning or investing, especially if you don’t know about that stuff.
Two reasons I can think of. One - you need money to pay for stuff on the regular. All of that money needs to be freely available whenever you need it. Investments tend not to be able to be cashed out on the fly, I think. Two - you get a guaranteed return instead of gambling on the return of an investment. Depending on what that money is for you might not be willing to take that risk.
Welcome to c/finance! Crossposted
Keep up this kind of posting and some lemmings will call you an ancap - happened to me.
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