From Safe to Satisfying: Comparing the Pros and Cons of VTI and Savings Accounts
It all depends on your risk preference and time horizon.
VTI (Vanguard Total Stock Market ETF) and a savings account (at a credit union or bank) are two very different investment options with distinct advantages and disadvantages.
VTI is an exchange-traded fund that tracks the performance of the total U.S. stock market, including large-cap, mid-cap, and small-cap stocks. Investing in VTI means investing in a diversified portfolio of stocks, potentially providing higher returns over the long term than a savings account. This eliminates the need for newbies to pick the best stocks or rely on one stock (such as Tesla, Apple, or Amazon) that may have a bad year.
On the other hand, a savings account is a low-risk investment option that provides a guaranteed interest rate. Savings accounts are ideal for short-term financial goals, emergency funds, or park cash that you may need soon. Savings accounts are generally FDIC-insured, meaning your deposits are protected up to a certain limit, making them a very safe option.
Let’s compare and contrast the two in terms of performance.
Take Stock of Great Returns
According to Vanguard, the average annual return of VTI from its inception in 2001 through December 31, 2021, was approximately 9.80%.
If you invested $10,000 for just one year (and the market returned its average), you would have an additional $980 at the end of the year.
Total Return = Initial Investment x Rate of Return
Total Return = $10,000 x 0.0980
Total Return = $980
Looks pretty good. It would be even better if you held it in a tax-advantaged account or didn’t sell until you’d held longer than a year (therefore only paying long-term capital gains tax). Even if the market only returned 3% (on pace with inflation), we’ll see how this contrasts with most savings accounts.
Eliminate Risk, But Lose Rewards
Hate risk but love dollars? Then you’ll probably be tempted to use a savings account instead. It’s definitely better than your mattress, but let’s understand what you’ll miss out on long-term.
According to Bankrate’s national survey of banks and thrifts, the average interest rate on savings accounts in the USA was 0.05% as of February 23, 2022. This rate has remained relatively low in recent years and is lower than the rate of inflation (especially now), which means that the purchasing power of your money in a savings account may decrease over time.
Although you have the ultimate safety of FDIC insurance and never have to worry about market conditions, do you know your average return?
Five dollars.
You could find that on the street or wash someone’s car for more money (especially over a year).
Total Return = Initial Investment x Rate of Return
Total Return = $10,000 x 0.0005
Total Return = $5
So while you’ll always have access to that $10,000 in case of emergency or a quick idea you want to capitalize on, you’ll pay dearly for it.
Make the Call Based on What’s Right for YOU
Now that you’ve seen this simple math, which is appropriate for you?
It will depend on your time preference, risk tolerance, and access to certain financial institutions. But the math is pretty straightforward: even over the long term, savings get wrecked. You “pay the price” to keep your money liquid and in cash at the end of the day.
Whether VTI is better than a savings account depends on your investment goals and risk tolerance. If you are comfortable with the potential volatility of the stock market and have a long-term investment horizon, VTI may be a better choice for potentially higher returns. However, a savings account may be a better option if you need a low-risk investment option for short-term financial goals.
