3 Bad Reasons to Open a Savings Account

Shock and horror. You were lied to. It's been five years since you opened your savings account, but you're earning pennies on deposits. Despite adding thousands of dollars, your nest egg has hardly inched up. Now, you're behind on saving for retirement. Plus, you're pissed off. What gives?

There are good reasons to open a savings account: to earn passive income safely; to build an emergency fund; and to save for medium-term financial goals, like home or car down payments. But there are wrong reasons, too. Below are three bad reasons to open a savings account.

1. To beat the stock market long term

When times are tough, you may be tempted to stick your money in a savings account and call it quits. In fact, it's often a good idea to keep some funds in a savings account. That way, you have money to draw upon in a pinch. Plus, you can use it to invest during downturns.

But here's the thing: The average savings account rate is less than 1%. Compare that to the stock market, which has returned an average of 10% per year over the past 50 years. Investing in stocks long term is much more profitable than keeping money in savings.

So don't open a savings account to beat the stock market over five or more years. You probably won't, as history has proven time and time again. Instead, open a top-tier online brokerage account and invest in a well-diversified stock portfolio for the long term.

2. To lock in high interest rates

When interest rates are high, you may be tempted to open a high-yield savings account to lock in historic premiums. This is a solid strategy for as long as the Federal Reserve elevates rates. Right now, you can easily earn more than 3% APY on deposits in the top savings accounts.

But there's a problem. Savings account rates aren't locked in. That's right -- your bank can lower rates whenever it wants. Your savings rates are likely to fall with Federal Reserve rates. But they could fall sooner or later -- there's no way to tell. It's up to your bank.

So don't open a savings account to lock in high rates. Instead, open a certificate of deposit (CD), which does lock in increased interest rates for six months to five years, depending on the term length you choose.

3. To spend with a cash back card

Many debit and credit cards offer you cash back on purchases. Earning cash back is basically receiving a 1% to 5% discount applied when purchasing an item. You may be tempted to open a savings account to combine high interest rates with the perks of cash back debit cards.

But most savings accounts don't offer cash back cards. What's worse, many banks limit you to six convenient monthly withdrawals, as per Regulation D.

So don't open a savings account to spend with a cash back card. Instead, consider opening a money market account to combine the best features of a checking account (easier spending; note that some money market accounts also limit you to six withdrawals per month) with the best features of a savings account (interest on deposits).

One good reason to open a savings account

Open a savings account to build an emergency fund. An emergency fund should ideally be enough to cover three to six months' worth of expenses. You're supposed to withdraw from the fund when you need to pay for unexpected bills, like medical treatment. That way, you can avoid taking on debt.

There are many good reasons to open a savings account. They make it easier to save, they're convenient, and you can open a bank account online in minutes. Stick to good reasons to open an account. You'll be glad you did, and you'll probably make more money long term.