If You Do One Thing With Your Savings Account This Year, Do This

Putting money into a savings account is undoubtedly a good move for your personal finances. Money in savings is accessible, so if you are saving for emergencies or for anything you’re going to need money for soon (like a vacation in a few months), a savings account is the right place for it.

But savings accounts should serve that very specific purpose. So, there’s one thing you should absolutely do with this type of account this year.

Ensure the money in your savings account actually belongs there

Making sure you have your saved cash in the right type of account can make a much bigger impact than almost any other move you could make with your money, like changing to a different savings bank to get a slightly higher rate.

See, you should have money in savings if:

  • You need it accessible at any time, such as for an emergency fund or a car or home repair fund. You cannot predict when you’ll need this money, so it should be available at all times.
  • You need it for a short-term goal and are going to have to pull money out of it fairly soon (like in the next two to five years).

Outside of those situations, money does not belong in a savings account. This is because using a savings account severely limits the potential return on investment that you can earn.

Here’s why taking this step is so important

There’s a good reason that auditing your savings account to make sure the money belongs in it is the single most important thing you can do with this account. The opportunity cost of leaving money in savings when it belongs elsewhere can be huge.

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Let’s say, for example, you have an extra $5,000 in your savings account for some reason. Maybe you left it there after buying your house because you’d saved more than you needed for a down payment. Or you saved a year’s worth of living expenses during the pandemic when you really only need six months saved.

The table below shows how much money you could miss out on by leaving that money in savings over 20 years, instead of moving it into a brokerage account or retirement account where it could be invested.

This scenario assumes a 4% interest rate on your high-yield savings account during all this time, which is a very generous (and unrealistic) assumption. It’s unlikely that savings account rates are going to stay that high over the long term once interest rates come down from their current highs. And it compares those yields to what you could reasonably expect to earn if you invested in a brokerage account. (The stock market has returned an average of 10% per year over the past five decades.)

Here’s what your $5,000 would grow into if you earn 4% over 20 years Here’s what your $5,000 would grow into if you earn 10% over 20 years
$10,955.62 $33,637.50

Data source: Author’s calculations.

As you can see, you really can’t afford to just let your money sit in savings when it could be working for you — unless, of course, there’s a good reason for it to be there. So take a close look at the money in your savings accounts, identify your goals for it, and decide if keeping it where it is remains the right choice or if you should make a change. You could end up a lot richer for doing so.

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