3 Good Reasons Not to Keep Money in a Savings Account (2024)

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.

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.

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3 Good Reasons Not to Keep Money in a Savings Account (2024)


3 Good Reasons Not to Keep Money in a Savings Account? ›

Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind.

What are 3 disadvantages of saving? ›

The disadvantages of using personal savings:
  • You're limited to what you can afford: your savings may only get you so far.
  • It's risky to spend all your savings: you might need your savings for a personal emergency.
  • Your responsibility for success: having more people behind your business could lead to more success.
Mar 15, 2024

Why shouldn't you keep money in a savings account? ›

Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind.

What are 3 cons to using a savings account? ›

There are also a few potential downsides to savings accounts.
  • Interest Rates Can Vary. ...
  • May Have Minimum Balance Requirements. ...
  • May Charge Fees. ...
  • Interest Is Taxable.
Sep 11, 2023

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 5 disadvantages of money? ›

The following are the various disadvantages of money:
  • Demonetization - ...
  • Exchange Rate Instability - ...
  • Monetary Mismanagement - ...
  • Excess Issuance - ...
  • Restricted Acceptability (Limited Acceptance) - ...
  • Inconvenience of Small Denominators - ...
  • Troubling Balance of Payments - ...
  • Short Life -

What are two disadvantages of saving money? ›

You might also enjoy…Budgeting Disadvantages (and How To Overcome Them)
  • The Disadvantages of Saving Money. Debt is Expensive. Fear of Missing Out (FOMO) Your Money is Losing its Value. You're Missing Opportunities to Increase Your Wealth.
  • Am I really at a disadvantage if I save?

Where do billionaires keep their money? ›

Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.

Is it bad to have too much money in savings? ›

Saving to prepare for emergencies, retirement or financial goals like buying a house is smart, to be sure. But if you're saving far more than necessary, you could be sacrificing other important aspects of your financial health, and that extra money could be put to better use elsewhere.

What are the pros and cons of a savings account? ›

Advantages and Disadvantages of Savings Account
  • Advantages.
  • Earn Interest. A savings account helps you earn interest on the deposited amount. ...
  • Safest Investment Option. ...
  • Minimum Investment Amount. ...
  • Disadvantages.
  • Interest Rates Can Change. ...
  • Easy Access. ...
  • Minimum Balance Requirement.

What are some pros and cons of savings? ›

Savings Account: Pros & Cons
High interest earnings will grow your money exponentially over time.Limited to certain types and amounts of withdrawals and transfers.
You can withdraw at any time during your bank's business hours.May require a minimum balance to avoid paying fees.
2 more rows

What are two pros and two cons of a savings account? ›

Three advantages of savings accounts are the potential to earn interest, it's easy to open and access, and FDIC insurance and security. Three disadvantages of savings accounts are minimum balance requirements, lower interest rates than other accounts/investments, and federal limits on saving withdrawal.

Is a millionaire's best friend? ›

Here's a little secret: compound interest is a millionaire's best friend.

What are the risks of saving? ›

Savings are generally low-risk, meaning your money is safe, but the interest rates received are also low. Generally speaking, short term is considered to be periods of around one year or less. Keep in mind when you will need funds, what your plan is for the funds, and the safety/risk associated with the goal.

What are the problems of saving? ›

Lack of Measurable Savings Goals: Another common mistake is not having measurable savings goals. Many people save money without a clear plan or objective in mind. This lack of direction often leads to inconsistent saving habits and makes it difficult to track progress.

What is the 3 saving rule? ›

This model suggests allocating 50% of your income to essential expenses, 15% to retirement savings and 5% to an emergency fund.

Is there any risk in a savings account? ›

Safety: Savings accounts at federally insured banks and credit unions are insured up to $250,000 per depositor, making them an extremely safe place to store money. Interest earnings: Unlike most checking accounts, savings accounts earn interest, enabling you to grow your money.


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