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Savings accounts are a safe place to build an emergency fund or save for specific goals, such as buying a car or taking a vacation. But traditional savings accounts have paltry interest rates. A high-yield savings account can help your money grow faster while keeping it safe until you need it. But there are a few things to watch out for. Here are seven mistakes to avoid so you get the most bang for your buck and find an account that fits your needs.
1. Not Shopping for the Best Interest Rate
You probably wouldn't take out a loan without comparing interest rates from multiple lenders, and you shouldn't open a savings account without shopping for the best rate either. Interest rates for high-yield savings accounts can vary by about 1% among financial institutions. If you open the first account you find, you may not get the best rate available.
What to do instead: Compare rates before opening an account. Check out brick-and-mortar banks, credit unions and online banks for the highest rate. You can even do a Google search for savings accounts with the highest interest rates to help you get started.
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2. Considering Only the Interest Rate
Maximizing your earnings is important, but the interest rate is only one factor to consider when choosing an account. You need to consider ease of access to your funds, any minimum balance requirements, bank fees and other features that could make one account stand out over another.
What to do instead: To find an account that aligns with how you plan to use it, it's important to evaluate multiple aspects of the account and financial institution—not just the interest rate. Consider the fees, account balance minimum, opening deposit minimum, transfer and withdrawal limits and other account requirements. Don't forget to review additional features such as the institution's mobile banking options, online bill pay and ATM network.
3. Not Automating Deposits
A high-yield savings account can help you grow your money faster than a traditional savings or checking account. But you won't maximize your earnings if you don't make regular deposits. Especially if you're using your high-yield savings account to save for an emergency fund, it's easy to let other expenses get in the way of saving if you don't put a mechanism in place to funnel money into your account.
What to do instead: Setting up automated deposits helps ensure you save consistently. This will help you grow your account balance faster, earn more interest on your money and reach your savings goals sooner. Even small amounts can add up quickly.
4. Using It Like a Checking Account
A savings account is for … saving. You shouldn't use money from it to pay your monthly bills or other routine expenses. Withdrawing from your high-yield savings account to pay bills or cover impulse purchases will mean you're saving less over the long run and could put you in a situation of taking on more debt in an emergency.
What to do instead: If you find yourself dipping into your savings account to cover everyday expenses like groceries or transportation, it's probably time to revisit your budget. Once you have a realistic budget that includes all your monthly expenses, you can set up direct deposit to have your designated savings amount sent to your savings account each month, week or pay period.
5. Opening Only One Account
If you have more than one savings goal, you're not alone. For example, you may be saving for a down payment on a house at the same time you're saving to pay for your wedding. Saving for multiple expenses in one account can make it difficult to track your progress for each goal. And it may tempt you to use money from one bucket to pay for something else.
What to do instead: There's no limit to the number of savings accounts you can have. You can open as many as you want. Having an account for each of your goals makes tracking your progress easier and reduces the temptation to use the money for something other than what it's designated for.
6. Not Tracking Your Progress
Setting up automatic deposits is a great strategy for saving consistently over time and can help you reach your goals faster. But if you set it and forget it, you could end up saving more than you need. While having a little extra cash in the bank is preferable to having too little, there is a better way.
What to do instead: Monitor your progress. Set aside a time each month, quarter or at some other interval to review how much you've saved and still need to accumulate to reach your savings goals. When you have enough, you can stop saving for that specific goal and put the money to use in another area of your life. Regularly reviewing your progress will help you avoid saving too much and missing out on potentially greater returns elsewhere.
7. Saving Too Much
If having some money saved is good, more must be better, right? Not necessarily. Having a fully funded emergency fund is crucial to preserving your financial well-being in the event of a job loss, large unexpected expenses or other emergencies. It can help you avoid using credit cards or loans, which can lead to more debt.
Planning ahead and saving for short-term goals such as a down payment for a house or wedding also helps keep your finances on track. Savings accounts are also a great option for these scenarios because your money is easily accessible and safe, thanks to Federal Deposit Insurance Corp. (FDIC) insurance. But you can have too much of a good thing.
What to do instead: While a high-yield savings account is a good alternative to a traditional savings account, you could earn a better return on your money elsewhere. Once you've built up a healthy safety net, you may want to consider ratcheting up your 401(k) or 403(b) contributions or funneling money into a taxable investment account to earn a higher return.
These types of accounts are riskier than savings accounts, so if you need the money soon, they're not your best bet. But if you have extra cash you want to invest for the future, they can potentially provide higher returns. Additionally, holding more than the allowed amount ($250,000 per account holder, account category and bank) for FDIC insurance means you run the risk of losing some funds in the event of a bank failure.
The Bottom Line
Having adequate savings is crucial for avoiding credit cards or loans when unexpected expenses pop up. Using a high-yield savings account can help you earn a better return on your money while keeping it safe and accessible when needed. When you have the cash you need on hand, you can keep your debt-to-income ratio low, which may improve your chances of qualifying for a loan for planned expenses such as a car or house.
Before taking out any loan, it's a good idea to check your free credit report and credit score to see how your habits are affecting your credit health.