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This is an important topic for discussion and therefore I decided to dedicate a separate blog for it. According to me, this is one of the biggest financial mistakes done by a lot of people wherein they just let the money sit idle.
We need to strive for a position wherein even when we are sleeping, our money is working hard and making more money for us. Your money should be working for you 24/7, even while you sleep. But, when we just let it lie idle in the bank account, then we are losing the money very fast to inflation.
This is not just one issue, but there are multiple other issues associated with this. Let’s go through all of them one by one.
I have come across people who just use their savings bank as a check-in account. Every month, salary gets into the account, all expenses are paid from this account and the surplus money just keeps getting adding into the bank account. Over some time, it becomes lakhs of rupees. No other investments, all expenses are paid from this account directly. A big problem! While it may make a person feel good while checking the bank balance, please understand that this is illusionary.
Soon, the power of compounding catches up and we end up withdrawing a lot of money from the corpus.
Solution:
If the money is not needed in the short term, consider investing in liquid funds, ultra-short bonds, or fixed deposits with better interest rates.
I can certainly understand if the money is parked into the account for a short duration, if you know that you would need the money soon. Even for that there are products like liquid funds and ultra-short bonds which can get higher returns and also with high liquidity and no penalty for early withdrawal. By no means am I suggesting that there should not be any money in a saving bank account? We need to have some money for our regular online automatic payments for various bills and also for an emergency purpose (you never know you could have an emergency on bank holidays when your mutual funds would not be accessible!).
There could be situations wherein friends and relatives need the money and they already know that you always have surplus money in your bank account. They approach you and even if you do not want to lend money to them, you are not able to refuse and soon the money goes out of your bank account. With a promise that it will be repaid soon, but it is returned late, or worse, the money is might not be returned on time (or at all).
Then it is an awkward position wherein you would not like to spoil your relationships for money, and then the money is then slowly written off. Many relationships go bad due to just one culprit – MONEY. My advice to people is always to keep money and relationships separate, both are too valuable for us to choose between them.
Keep excess cash in investments rather than a savings account to avoid unnecessary requests.
I know people who lack self–discipline when money is in their bank accounts. It becomes difficult to control expenses and money gets spent on a lot of wants and not just the needs.
Having too much cash easily accessible leads to uncontrolled spending. Without proper budgeting, you might start spending on:
Future planning is not done and soon, the situation goes out of control. The bank balance keeps depleting and we start living paycheck to paycheck. It becomes difficult to get past the entire month. There is no other option but to start taking loans to meet the regular expenses. Scaling down of the luxurious life becomes difficult and before we realize, we get into debt trap. Easy to get into it, but difficult (though not impossible) to come out of it. Do read one of my previous blogs, wherein I have mentioned some strategies to come out of it.
Since for all our expenses we simply start taking out money from this bank account, there is
By the time, this realization sets in, it is already too late, since we did not take the power of compounding to our advantage. Financial freedom becomes a distant dream.
This problem is a no-brainer. Having the entire amount in one bank account can be risky. We all know about the increasing internet frauds by phishing, vishing etc. What if account details get hacked and the money is swiped away by fraudsters?
Keeping all your money in one bank account is risky due to:
Solution:
Now that we have discussed what are the issues of keeping the money in one such big account, let us discuss what we should do? Let’s discuss the best alternatives
What most people do:
Income Minus (-) Expenses = Savings
We keep procrastinating the plan for savings, waiting for the right opportunity when we would have enough money for it. It turns out that there are extra expenses in a month either due to any emergency or due to the luxuries (generally the latter) and the decision for investment shifts to the following month, and then the following …..
Change the mindset. Make some changes to the above equation:
Income Minus (-) Savings = Expenses
Pay yourself first. Prepare a high-level budget. Know your monthly expenses, and the various other quarterly and annual expenses. Keep some contingency over and above this.
To make it easier, I’ve created a FREE Personal Finance Toolkit that includes:
✅ Budgeting & Expense Tracker
✅ Savings & Investment Planning Sheet
✅ Step-by-Step Guide to Financial Freedom
I hope this blog was useful. If you’d like to read more of my blogs or subscribe to my YouTube channel, check out these links:
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💬 What do you think? Share your thoughts in the comments or reach out to me if you’d like personalized guidance!
