Get the app
Get the app

Join millions of investors on Stash

Investing, simplified

Start today with as little as $5
Get the app

5 Examples of How You May Be Using Your Savings Account The Wrong Way

October 17, 2017

4 min read

A savings account seems simple enough: deposit money and earn a little interest while you save for future expenses. Still, when not used correctly, a savings account can end up hurting your finances.

Here are five ways you may be using your savings account the wrong way.

1. Using it to park all your cash

With interest rates as low as they are, keeping your cash in a savings account is akin to stuffing it in a mattress – at least as far as earnings are concerned. While it’s a good idea to keep some cash in a savings account – it’s quick and easy to access in case of emergencies, after all – it may not be the way to plan for the future.

Instead, keep enough in cash in your savings account to cover emergencies and the specific expenses you’re saving for – and invest the rest in stocks, bonds and/or ETFs that match your risk profile.

2. Not paying attention to the numbers

One savings account may appear to boast a high interest rate, but watch out – a lot of banks offer great introductory interest rates, only to lower them after a few months. Before opening an account, make sure you know the true interest rate, and for how long that rate will be in effect.

Also important: Fees. Many banks charge a set fee each year – say, $25 – plus an additional amount each month that your account falls below a certain balance. Also, most banks limit the number of withdrawals you can make each month. Each time you exceed that number you may be hit with a withdrawal penalty. If you have a small balance to begin with, these fees and withdrawal penalties could wipe out your account in a matter of months.

3. Using it to protect your money from inflation

With today’s interest rates, it doesn’t make sense to hedge against inflation by storing your money in a savings account. Here’s why: Assume you have $100 in a savings account that pays a 1% interest rate (pretty standard these days). After one year, you’ll have $101. Meanwhile, the inflation rate in the U.S. is projected to hit  2%, which means you’ll need $102 to compensate for the higher prices of goods and services.

With only $101 in your account, you will have actually lost some purchasing power by keeping your money in that low-interest account. Yikes.

The good news is that there are places to put your money that are still relatively low risk, but that offer the potential for better earnings,helping you to ease the inflation burden.

While many investors traditionally use stocks for inflation protection, exchange-traded funds (ETFs) offer a good alternative, especially for those trying to limit or diversify risk. Because ETFs are “baskets” of securities (rather than just a single stock), investors can effectively spread out their risk across companies, industries, sectors and even parts of the world. Keep in mind diversification is not a guarantee that your investments will be protected in a down market.

4. Using it like a checking account

Savings accounts are intended to provide a safe place to keep your money while you save for future expenses – whether that’s a dream vacation, emergency fund or a down payment on a car. If you end up using your savings account like a checking account, however, you may have a hard time ever reaching your savings goals.

Once you deposit money into your savings account, do your best to keep it there until you reach your goal. If you have trouble leaving that money alone, consider opening an account that isn’t linked to your checking/ATM/debit accounts so it will be harder to access for those impulse buys.

5. Using it to save for retirement

If you use your savings account to squirrel money away for retirement, you’re making a big mistake. That’s because the interest you earn in a savings account is next to nothing, which means that – even with the magic of compounding – your nest egg won’t grow enough.

There are better ways to save for retirement.

Here’s an example. Say you start with $1,000 in your savings account and add $500 a year for 25 years. Assuming a 1% interest rate, your account balance would be $15,545 after 25 years – $2,045 of which would be earnings.

Now, start with the same $1,000, but put that money in a tax-advantaged Roth IRA.

If you contribute the same $500 a year and earn a 5% (a realistic goal for IRAs), after 25 years, your account balance would be $28,443 you would have earned nearly $15,000 – more than seven times what you would have earned by keeping your money in a savings account.

Max out your contributions each year ($5,500 for 2017) and you’d have $279,000 after 25 years or more than $1.2 million after 50 years – good reasons to open an IRA today.

Are there other ways to save for your future?

Yes. Investing in the stock market could be an effective alternative to save for your financial goals, provided you follow a long-term and consistent investment strategy.

Investing, simplified

Start today with as little as $5

Get the App



By Jean Folger

Next for you
How Many Credit Cards Do You Really Need?

Investment Profile

Bonds Worldwide

An International Bond ETF on Stash

Learn more
Explore more articlesChoose a topic to learn more about
budgeting Careers pop culture Technology Retirement

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Before investing, please carefully consider your willingness to take on risk and your financial ability to afford investment losses when deciding how much individual security exposure to have in your investment portfolio.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit www.stashinvest.com/disclosures.