Add this financial decision to your list: how to best use the money in savings.
Ideally, we'd all have at least one savings account. Whether you're building an emergency savings fund or planning for a short-term goal, a savings account can help you get there. However, you may occasionally need to pull money out of savings. Here, we outline four examples of when it makes sense to withdraw funds.
1. When inflation gnaws away at the value
Once you factor inflation into the equation, leaving too much money in a savings account does not make sense. Looking at data from 1960 to 2021, we learn that the rate of inflation ranged from -0.4% to 13.55%. That means the average rate of inflation over those 61 years was 3.8%.
As the Federal Reserve works to cool inflation in the U.S., the rate at the end of February was 6%. While that's painful for consumers, history tells us that the rate will drop. So, let's imagine that it drops to its "average" rate of 3.8%. If your savings account does not pay at least 3.8%, you're losing money to inflation.
That's when it's time to pull a portion and transfer it to a safe place where it has a chance to grow. The best way to do that is to compare the current rate of inflation to financial products like T-bills, certificates of deposit (CDs), or money market accounts (MMAs). The goal is to find an APY as close to the rate of inflation as possible. Even better is when you find a rate that beats inflation.
2. To retire debt
Let's say you've built an emergency savings account that holds enough money to cover three to six months' worth of expenses. However, you're carrying high-interest debt on two credit cards and a personal loan. While you should never take money from your emergency stash, if there's extra in savings, the best move may be to use it to pay off debt.
A debt calculator like this can help you determine how much money you can save by ridding yourself of high-interest obligations.
3. To cover a large expense
You work hard to put money away and it can be difficult to take money out of your savings account, even when it's warranted. If your basem*nt floods, transmission dies, or you run into another large expense, you'll likely want to pull money from savings. Yes, it's challenging to watch your balance shrink, but paying out of pocket is far better than using a credit card or loan to cover the expense.
4. To pay for a short-term goal
This may go without saying, but savings accounts aren't just for emergencies. They're also a great place to sock away funds for the things you're looking forward to. For example, if you've been squirreling away a little each month to pay for a vacation, being able to withdraw the funds you'll need to pay for the getaway feels pretty great.
Beware of limits
While it's your money and you have the right to withdraw it whenever you want, some financial institutions only allow six "convenient" savings transactions per month, due to Regulation D (even though it's supposed to be suspended right now). You may be charged a fee for any transactions beyond that number. If you pull from savings too often, a bank may also convert your savings account into a checking account or even close your savings account.
What constitutes a convenient transaction? If your bank sets a monthly limit on your account, wire transfers, ATM withdrawals, and in-person withdrawals are typically considered convenient transactions and contribute to the monthly limit. If you're unsure of your bank's policy, check with it. If your bank limits transactions, ask it to spell out which types are considered convenient.
The bottom line is that building a savings account balance takes time and effort. Any time you're tempted to make a withdrawal, ask yourself if the move will ultimately save you money.
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