A savings account might appear to be the antithesis of an active investment plan. In some regards, though, a savings account complements a more active investment strategy by helping you to implement that strategy more efficiently.

The contrasts between the two investment methods are striking. A savings account is generally considered a passive form of investment--the deposited funds are safe, and savings account rates offer only a modest return on your money. In contrast, an active investment strategy entails risk, with the possibility of higher rewards. An active investment portfolio may include a wide variety of securities, including domestic and foreign stocks and bonds, and can involve constant decision making in fast-moving financial markets.

In short, the two approaches could hardly be more different, and that's exactly the point. It is these differences that can make the two work so well together.

The Safe Haven Is Now Safer Than Ever

Investors have recently rediscovered--the hard way--the advantages of savings accounts when financial markets get too volatile. Savings accounts are an excellent safe haven, and 2008's extreme bear market sparked a flight to bank deposit accounts.

In fact, that safe haven is now safer than ever. In reaction to the 2008 banking crisis, the per-depositor dollar limit on FDIC insurance was increased temporarily from $100,000 to $250,000. This temporary increase, originally slated to expire at the end of 2009, has now been extended through the end of 2013.

In light of recent market performance, the safety and stability of savings accounts look extremely attractive. However, jumping out of active investments when they've been hard hit can mean missing out on the subsequent recovery. Using a savings account as a holding tank for trying to time moves in and out of the stock market or other active investment options is also risky. Instead, there is a more constructive way to use a savings account as a staging area for more aggressive investments.

Accumulating Assets in a Savings Account for Active Investment

Most people save money incrementally--that is, they put aside small amounts from paycheck to paycheck rather than accumulating money in large lump sums. Now, stocks and bonds are appropriate investments for most long-term savers, but those types of investments are not well-suited to small, incremental investments.

For one thing, buying stocks and bonds in small amounts can cause investors to incur high transactions costs as a percentage of each purchase, and even mutual funds often impose minimum transaction limits. Moreover, unless the investment portfolio is inside a tax-deferred vehicle, making a series of frequent, incremental investments can make your tax accounting more complicated. You will likely need to track a different cost basis for each biweekly investment, or however frequently you get a paycheck.

This is where savings accounts come in. They are an ideal way to accumulate those incremental savings so you can periodically make larger investments in stocks and bonds. You'll be earning something from savings interest rates in the meantime, and ultimately you'll be investing more efficiently and with less of a record keeping burden.

Source:

Deposit Insurance Simplification Fact Sheet • Jun 24, 2009 • FDIC: http://www.fdic.gov/deposit/deposits/DIfactsheet.html

Claude Solnik • Bank deposits surge as investors shun riskier investments • May 27, 2009 • Long Island Business News: http://libn.com/blog/2009/05/27/bank-deposits-surge-as-investors-shun-riskier-investments/