No matter your income or stage of life, you need money set aside in the bank for emergencies. Ideally, your emergency fund should contain enough cash to cover three full months of essential expenses at a minimum. But while it's a good idea to keep emergency cash in a savings account, here are three scenarios where it's best to stash your money elsewhere.
1. It's for retirement
The money you're setting aside for retirement should be kept outside of a savings account for a couple of reasons. First, you need your money to grow at a faster pace than what a savings account will allow for. Right now, many high-yield savings accounts are paying somewhere in the vicinity of 4% to 4.5%, but today's rates are unusual. Historically, they've been lower on many occasions.
What's more, while a risk-free 4% or 4.5% return on your money may be nice, the stock market's average return over the past 50 years, as measured by the S&P 500, has been 10% before inflation. So if you keep your retirement nest egg in a savings account, you might lose out on the higher returns you need to outpace inflation over time.
Also, a savings account won't give you any sort of tax break on your money. The interest you earn on your money will be taxed at the same rate as ordinary income -- the highest rate you're subject to. A better bet is to save for retirement in an account like an IRA, where your contributions go in tax-free.
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Capital One 360 Performance Savings 
APY 4.25% Rate infoSee Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY)is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Open Account for Capital One 360 Performance Savings OnCapital One'sSecure Website. Member FDIC. | APY 4.25% Rate infoSee Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY)is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. | Min. to earn $0 |
CIT Platinum Savings
APY 4.85% APY for balances of $5,000 or more Rate info4.85% APY for balances of $5,000 or more; otherwise, 0.25% APY Min. to earn $100 to open account, $5,000 for max APY Open Account for CIT Platinum Savings OnCIT'sSecure Website. Member FDIC. | APY 4.85% APY for balances of $5,000 or more Rate info4.85% APY for balances of $5,000 or more; otherwise, 0.25% APY | Min. to earn $100 to open account, $5,000 for max APY |
American Express® High Yield Savings
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2. It's for college
Just as you need your retirement savings to grow at a pretty rapid rate, so too do you need to see your college savings take off nicely. With retirement, you might have a 40-year window or longer to save. With college, you may be limited to an 18-year window if you want your kids to start as soon as they graduate high school.
There are different accounts you can use to save for college. But if you want to enjoy some tax savings, you may want to consider a Roth IRA or a 529 plan. Both of these accounts allow for tax-free investment gains, and withdrawals are tax-free as well (in the case of a 529, tax-free withdrawals only apply to qualified educational expenses).
3. It's for a really far-off goal
Generally, it's not the best idea to invest money you expect to need within seven years. It might take the stock market a long time to recover from an extended slump, so if you're saving for a near-term goal, keeping your money in the bank is generally a smarter bet.
But if you're saving for a far-off goal, like buying a second house, and you don't expect to reach that goal for a good 10 to 15 years, then investing your money could get you closer to meeting that objective. And in that case, you're better off keeping that money in a brokerage account.
A savings account is a great home for your emergency fund. And if you're socking away money to pay for holiday gifts in December or take a vacation at the start of 2024, then a savings account is probably your most optimal choice. But if you're saving for retirement, college, or another far-off goal, then it's best to put your money to work by investing it, even if that means forgoing the safety of a savings account.
FAQs
You would face a penalty from the bank
If you do not have enough funds, your balance will gradually deplete over time. This will make you lose out on the Savings Account interest rate.
What are 3 cons to using a savings account? ›
Cons
| Pros of Savings Accounts | Cons of Savings Accounts |
|---|
| Money is safe | Low return |
| Easy access to funds | Rates may not beat inflation |
| Automatic savings | Transaction limits |
| Takes no or little money to start | Might have fees and account balance minimums |
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You would face a penalty from the bank
If you do not have enough funds, your balance will gradually deplete over time. This will make you lose out on the Savings Account interest rate.
Why shouldn't you put money in a savings account? ›
Keeping too much of your spare cash in an account that generates little interest means you're missing out on the opportunity to grow your money. According to Bankrate data, the average savings account pays just 0.59 percent annual percentage yield (APY) as of July 22, 2024.
Which is not a reason to save money in a savings account? ›
Answer and Explanation:
C) Protections against inflation is not a benefit of a savings account. Inflation is a decrease in the value of cash over time due to financial and monetary policy that means that prices of goods and services increase faster than the value of money.
What are the pros and cons of saving money? ›
Savings account benefits include safety for your savings, interest earnings and easy access to your money. However, savings accounts may have drawbacks, such as variable interest rates, minimum balance requirements and fees.
What are 3 benefits of a savings account? ›
Take advantage of the best features of a savings account—access, security, interest, and bill pay—with a trusted partner who's invested in your long-term success.
What do savings accounts not do? ›
Savings accounts provide you with some access to your funds, although they don't provide the same ease of access that checking accounts do — and for a reason: Savings accounts are mostly designed for building an emergency fund or saving for other goals, rather than for everyday spending.
Is it worth it to keep money in savings? ›
A savings account is also helpful for covering any immediate financial goals you want to achieve over the next two years. You can access your money whenever you want, and in the meantime it sits in a stable FDIC-insured account.
Why isn't it good to keep money in the bank? ›
By leaving all your money in a bank you inadvertently incentivise the bank to take excess risk with your money – for free. Banks don't only use our money to lend on mortgages. They are able to invest in any way they like, as long as they hold a sufficient reserve.
Lower potential returns compared to investing. Potential for savings accounts to fail to keep up with inflation, eroding your purchasing power over medium- and long-term time horizons.
Are you losing money in a savings account? ›
It's important to not keep too much money in your savings, and consider investing money over what you need for an emergency fund or that big near-term financial goal you're working toward. Money kept in a savings account for many years will definitely lose value to inflation.
Do savings accounts penalize you? ›
Many banks will penalize you by charging you an excessive withdrawal fee if you exceed that limit. Some may close the account or move it to a noninterest-bearing account. Excessive withdrawal fees often range from around $2 to $15, Bankrate found.
What are the risks of a saving account? ›
The interest rate on savings generally is lower compared with investments. While safe, savings are not risk-free: the risk is that the low interest rate you receive will not keep pace with inflation. For example, with inflation, a candy bar that costs a dollar today could cost two dollars ten years from now.
Why can savings be negative? ›
Saving can be negative when consumption is greater than income. Negative saving amounts to borrowing.
Why do we not save money? ›
One of the most common reasons is that you might not have a good enough reason to save. Maybe you're overly focused on the present, or maybe you simply don't know what you want in the future. Either way, you need to get a vision for what you want to achieve with your money.
What is a negative impact of a savings account? ›
Disadvantages of Savings Accounts
Interest rates are variable, not fixed. Inflation might erode the value of your savings. Some financial institutions require a minimum balance to earn the highest interest rate. Some accounts might charge fees.
What are the weaknesses of savings? ›
Three disadvantages of savings accounts are minimum balance requirements, lower interest rates than other accounts/investments, and federal limits on saving withdrawal. If you're fortunate enough to have extra money for long-term goals, first, pat yourself on the back!
What is the disadvantage of basic saving account? ›
Disadvantages of Savings Account
- Interest rates can change. Savings account interest rates in India can fluctuate, leading to variable returns. ...
- Minimum balance requirements. ...
- Withdrawal limits. ...
- Inflation. ...
- Compounded interest.
not having enough growth potential. The return from saving accounts is normally low since the interest rate paid by the financial institutions is low. Most banks offer an interest rate of less than 5% on saving accounts. This interest rate is shallow compared to other interest-paying assets like bonds.
