Some high-yield savings accounts are currently paying around 4.00% or 5.00%, but this is an unusually high rate. That's due to current economic conditions as the Federal Reserve has repeatedly raised rates to fight inflation caused by COVID-19. In general, most savings accounts in recent years have paid under 2.00%, and many still do.
Because savings accounts typically don't provide a very generous return on investment, it's really difficult to get rich just by sticking your money in savings. But there are some steps you can take to become wealthy -- and you need to follow them if you want to retire in comfort without trying to live on Social Security benefits that replace just 40% of pre-retirement income, according to the Social Security Administration.
Open a tax-advantaged investment account
The first step to getting rich is to take advantage of tax breaks that help you grow your wealth. Specifically, there are several tax-advantaged retirement plans you may want to invest in, including:
Read more: unlock best-in-class perks with one of these brokerage accounts
- A workplace 401(k): Your employer may offer this account, and you may be able to earn matching contributions. When you invest, you don't pay taxes on the money you put into your account, so each contribution doesn't reduce taxable income by as much.
- An IRA: You can open this account with any brokerage firm. You also get to take a tax deduction for your contributions. You don't need an employer to help, and you'll have a choice of which financial institution to invest with. You'll also get to buy just about any assets available with your broker, and will therefore have a broad choice of investments.
You may also opt to open a Roth 401(k) (if your employer offers one) or Roth IRA (with a brokerage firm of your choice) instead. These accounts defer your tax savings until later. You don't deduct contributions when you make them -- but you withdraw money as a retiree without owing any taxes.
These tax-advantaged accounts can mean your money goes a lot further when you invest due to the tax savings -- especially if you are also getting a matching contribution from an employer. The table below shows how a contribution might work for a 401(k) if you invest $5,000, get a 50% match from your employer on that entire amount, and are in the 22% tax bracket.
| Amount you contribute to your 401(k) | $5,000 |
|---|
| Tax break you earn | Up to $1,100 |
|---|
| Employer matching contribution | $2,500 |
|---|
| Amount you end up investing in your 401(k) | $7,500 |
|---|
| Amount you actually reduce your take-home income by after accounting for the tax break | $3,900 |
|---|
Data source: Author's calculations
As you can see, there is no reason not to take advantage of tax savings because it'll mean you don't reduce your buying power by nearly as much as the total amount you're investing.
The specific amount you end up saving over your career will depend on how much you invest, as well as what rate the deducted income would otherwise have been taxed at. But if you contributed $5,000 each year to your 401(k) for 20 years and all the money you contributed otherwise would have been taxed at the 22% rate, you'd save a grand total of $22,000 in taxes due to your investments.
Invest your money
Once you've opened your 401(k) or IRA, the next step is to pick investments. For many people, the best choice is an index fund.
Index fund investing does not require you to have any specialized investment knowledge. Funds track financial indexes and are designed to mimic the performance of those indexes. For example, you could buy an S&P 500 index fund, which is designed to track the performance of the S&P 500. You would gain an ownership interest in around 500 of the largest U.S. companies if you went this route.
Index funds provide easy diversification because money is invested in lots of different companies that are part of the financial index. They often charge low fees and have a consistent performance track record. The S&P 500 specifically has consistently earned 10% average annual returns over many decades.
That return on investment is enough to help you build wealth much more easily than putting your money in savings. In fact, $7,500 a year invested for 20 years at a 10% average annual interest rate would give you a $472,518.75 nest egg -- compared with just the $232,269.00 you'd have if you had the money in a savings account earning 4.00%. It's also important to note that savings account APYs fluctuate, so even if you're earning 4.00% now, you likely won't be over a long period of time.
By taking advantage of tax breaks and investing for your future, you can get rich and enjoy a life of future financial security instead of one filled with money worries.
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FAQs
Because savings accounts typically don't provide a very generous return on investment, it's really difficult to get rich just by sticking your money in savings.
Why doesn't saving money make you rich? ›
The value of money decreases over time. This means $1 today won't buy you the same amount of goods and services as it would in a decade. Let's say the inflation rate averages 2.5% and you have a total of $1000 saved. This means the $1000 you saved today will be reduced to a value of approximately $690 in 15 years.
Do rich people use savings account? ›
Millionaires Don't Keep Much in Their Traditional Savings Accounts. “My millionaire clients keep very little of their net worth in a traditional savings account. $10,000 or less,” said Herman (Tommy) Thompson, Jr., CFP, ChSNC, ChFC, a certified financial planner with Innovative Financial Group.
Why would someone invest their money instead of saving it in a bank? ›
Investing products such as stocks can have much higher returns than savings accounts and CDs. Over time, the Standard & Poor's 500 stock index (S&P 500), has returned about 10 percent annually, though the return can fluctuate greatly in any given year. Investing products are generally very liquid.
Where do millionaires keep their savings? ›
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Is having 100k in savings rich? ›
Having over $100k in savings is generally considered a good financial position in the United States.
How much money in savings is rich? ›
That's how financial advisors typically view wealth. The average American, on the other hand, sees $774,000 as a sufficient net worth to be financially comfortable and a net worth of $2.2 million to be wealthy, according to Schwab.
Do poor people save money? ›
“A common misconception is that people who are poor or have low incomes can't save,” she said. “Evidence from savings programs and research shows they can.” McKernan and the other experts we spoke to for this piece provided some steps for people with smaller incomes to start building their savings.
How much do wealthy have in savings? ›
How big is that bank account?
| Percentile of Income | Average Bank Account Balance |
|---|
| 90% to 100% | $111,600 |
| 80% to 89% | $33,800 |
| 60% to 79% | $15,760 |
| 40% to 59% | $7,400 |
2 more rowsNov 1, 2023
The Most Popular Banks for Millionaires
- JP Morgan Private Bank. “J.P. Morgan Private Bank is known for its investment services, which makes them a great option for those with millionaire status,” Kullberg said. ...
- Bank of America Private Bank. ...
- Citi Private Bank. ...
- Chase Private Client.
Where do millionaires keep their money? High net worth individuals put money into different classifications of financial and real assets, including stocks, mutual funds, retirement accounts and real estate.
How much do most people have in a bank? ›
The median savings account balance for all families in the U.S. was $8,000 in 2022. Generally, higher-income earners and older individuals save more than younger ones. Some experts suggest three to six months' living expenses as a goal.
Should I pull money out of the bank? ›
In short, if you have less than $250,000 in your account at an FDIC-insured US bank, then you almost certainly have nothing to worry about. Each deposit account owner will be insured up to $250,000 — so, for example, if you have a joint account with your spouse, your money will be insured up to $500,000.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How much money in savings makes you rich? ›
Someone who has $1 million in liquid assets, for instance, is usually considered to be a high net worth (HNW) individual. You might need $5 million to $10 million to qualify as having a very high net worth while it may take $30 million or more to be considered ultra-high net worth.
How much should you have saved by 30 to be rich? ›
By 30, it would be beneficial to have $50,000 saved. This comes from the goal of being able to replace about 70% to 80% of your pre-retirement income in retirement.” While having the equivalent of your annual salary saved up by 30 may seem unattainable, Kovar believes it's achievable if you start saving in your 20s.
How to invest 100k to make $1 million in 10 years? ›
The simplest path from $100,000 to $1 million
The simplest way to invest your money is by using a simple broad-market index fund. An index fund that tracks the S&P 500 or a total stock market index typically has low fees, and it's going to closely match what the overall stock market returns.
