Ramit Sethi Says Your Savings Account Won't Help You Grow Wealth -- but This Account Will

It's an account it pays to open and start funding.

No matter your age or income, it's important to have a solid emergency fund -- one with enough money to cover three months of essential bills at a minimum, and, ideally, more like six to even 12 months' worth of bills. Not only that, but your emergency fund should be kept tucked away safely in a savings account. 

But what about the money you have that isn't earmarked for emergencies? Ideally, you'll reach a point where your emergency fund is complete but you're able to keep saving. 

You may be inclined to keep rolling that extra money into the bank. But here's why financial guru Ramit Sethi says that's a poor choice.

A savings account won't make you wealthy

Putting money into a savings account is a pretty safe prospect. That's because the FDIC will insure your deposits of up to $250,000 per person, per account. The same can't be said for investments in a brokerage account.

When you put money into a brokerage account and invest it, you run the risk of losing money if you choose a bad stock or if the stock market underperforms as a whole (which has been the case this year). But if you keep all of your money in a savings account and don't branch out into a brokerage account, Sethi insists you'll deny yourself the opportunity to grow wealth. 

These days, you can snag a 2% interest rate (or thereabouts) in a savings account. But that wasn't always the case. For years, savings account rates were much stingier, and it's only recently that they've gotten more generous.

But even so, if you invest money in a brokerage account and your portfolio does well, you might manage to score an 8% return, 10% return, or higher. The result? A lot more money over time.

In fact, let's say you decide to put $20,000 into a savings account and leave it alone for the next 20 years. If that account pays 2% interest, you'll end up with roughly $29,700. 

But now let's imagine you put that $20,000 into a brokerage account for 20 years. If you score an average annual 8% return on your money during that time, you'll end up with about $93,200. Talk about a world of difference.

Don't play it too safe

It's easy to see why some people may be inclined to keep most or all of their money in a savings account. The idea of losing money on an investment can be daunting and upsetting. But if you limit yourself to a savings account, you might really lose out on the chance to build wealth through the years and retire with a comfortable nest egg. 

As such, if you have money available you don't need for your emergency fund, it pays to open a brokerage account and put it to work. If you don't, you might end up sorely regretting that decision later in life when you've managed to accumulate some wealth, but not a whole lot.