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Why It Doesn't Pay to Save

The state of our economy may not have people hiding money in mattresses, but it certainly has them putting a majority of their monthly funds into basic savings accounts.

According to budgeting website BillShrink, which aggregates data from its user base, the average dollar amount Americans say they have in savings is $57,735. Additionally, the average amount BillShrink users say they intend to save each month is $543.

"A lot more people are holding on to their cash," says Schwark Satyavolu, CEO of BillShrink. "People are scared about the future of the economy. They feel the need to have a rainy-day fund."

While a certain amount of trepidation is understandable, there are disadvantages to squirreling away all of your money in a bank vault. Generally speaking, Satyavolu says, consumers get a rate of 0.5% to 1% on a basic savings account, a sad side effect of the bad economy most people electing to bank their money already understand.

What they fail to consider, however, is inflation, the rise in prices of goods and services in an economy over time. The inflation rate in the U.S. rests at 1.1%, down significantly from the 2.6% rate this year and a long-term high of 3%.

Once you also deduct the money you pay on your earnings in taxes each year, even those on the high end of the interest rate scale will be below the rate of inflation. This means you can't expect to make money off of your savings account. In fact, Schwark points out, thanks to inflation, your money is going to be worth less six months to a year from now.

"You're not going to get rich by saving right now," Satyavolu says, before cautioning consumers against going on a spending spree: "The goods you purchase will also depreciate in value."

Fortunately, those interesting in making money off of their money are not without low-risk alternatives:

Pay down your debt.
According to Satyavolu, people should use money they were planning to put in a savings account, first and foremost, to pay off debt incurred during the recession.

"Start from the account that has the highest interest rates and work your way down to those that have the lowest," Schwark says, adding that even those not in dire straits should pay off low-interest credit lines associated with large purchases, such as a mortgage or car loans. While paying down debt is not an investment, consumers save extra dollars by avoiding the interest rates associated with lines of credit.

Put your money into tax-advantaged accounts.
If you are lucky enough to be debt free, you should consider investing as much money as you can in tax-advantaged accounts. These include employer-sponsored 401(k) plans, which let people put money away for retirement; a 529 plan, which lets parents or other relatives save for a child's college education; or even a health savings account, which lets people accumulate funds for health care costs and services.

All of these different options are tax-deferred, meaning you won't pay taxes on the money that goes into the account unless you take it out before the terms of your contract specify. For example, most 401(k) accounts cannot be accessed without a penalty until the account holder turns 59.
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