Ramit Sethi Says Saving Money Is Not the Key to Getting Rich -- This Is

It pays to heed his advice.

We're often told that it's important to have money in a savings account to cover unplanned bills. And that's absolutely spot-on advice. You never know when your car might need a costly repair, or you'll be out of work due to health issues. Having an emergency fund in savings could help you avoid debt or other financial hardships during such events.

Furthermore, you may have near-term goals you're trying to save for. Maybe you're engaged and are socking funds away for a wedding. Or maybe you could really use a new car and want enough for a solid down payment.

Just as a savings account is the ideal place to keep your emergency cash, so too is it the right place to keep money for short-term objectives. But if your goal is to grow wealth over time, personal finance expert Ramit Sethi insists that a savings account won't get you there.

Don't sell your goals short

The upside of keeping money in a savings account is that your principal is protected. Deposit $20,000, and you're guaranteed that your account balance will be at least $20,000 in three years, provided you don't incur fees or take a withdrawal.

But the downside to keeping all of your money in a savings account is that you earn minimal interest. Even during periods when banks pay more generously, the interest rate you earn in a savings account will probably be less than the rate of inflation. That means if you're saving for a long-term goal, like retirement, you could fall seriously short if you limit yourself to a savings account.

That's why Sethi says that for longer-term goals, it's best to open a brokerage account and invest your money. You can also invest in an IRA for funds you want specifically earmarked for retirement.

While investing your money carries risk -- namely, your principal isn't protected -- you might generate much higher returns in a brokerage account or IRA than in a savings account. That could, in turn, leave you with more buying power in retirement. It could also make it so you're able to meet other long-term goals.

How to invest for the first time

If you've never invested, jumping in can be daunting. And to be clear, you shouldn't just pick random stocks out of a hat and hope for the best. It's important to research stocks and figure out if they're a good buy. Many brokerage accounts have educational resources that can teach you how to do that.

When starting out, a better bet may be to load up on broad market index funds. Index funds are passively managed, and their goal is to simply perform as well as the market indexes they're associated with. So if you buy shares of an S&P 500 index fund (which tracks a major market index), you don't have to research companies individually. Instead, you're effectively investing in the stock market as a whole.

Savings accounts definitely have their advantages. But when it comes to getting rich over time, investing is the way to go. The sooner you recognize that, the sooner you can start really putting your money to work.