4 Reasons I Won't Keep Even $1 Extra in My Savings Account

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page. APY = Annual Percentage Yield. APYs are subject to change at any time without notice.

KEY POINTS

  • I have some money in a high-yield savings account, but I limit the money I keep in it.
  • I don't want to put more than necessary in there because there are better things to do with the cash.
  • More generous returns and tax benefits are just two of the reasons I put the rest of my money in other accounts.

Keeping extra money in savings may not be the smartest financial move.

Like many people, I have money in savings. In fact, I have several thousand dollars in a high-yield savings account. The money I have in there is for my emergency fund, as well as for big purchases I am saving up for and that I plan to make within the next year or two.

I won't keep more money than I need to in savings, though. In fact, I've calculated the amount needed to accomplish my goals and to be prepared for a rainy day, and I only put that amount of cash in savings and not even $1 more.

It may seem odd not to want to have more money saved, but there are four really good reasons why I keep my account balance as low as I can while still being financially responsible.

1. The money loses ground due to inflation

Savings accounts -- even high-yield ones -- don't pay much interest. That's true even though many accounts have been increasing the rates they pay in recent months as the Federal Reserve has raised the benchmark interest rate.

Our Picks for the Best High-Yield Savings Accounts of 2024

APY
4.25%
Rate info Circle with letter I in it. 4.25% annual percentage yield as of July 18, 2024
Min. to earn
$1
APY
5.10%
Min. to earn
$0
APY
4.50%
Min. to earn
$0.01

Because the return on money in savings is very low, money in these accounts actually loses buying power. If inflation is going up at a rate of 8% or higher (as has been the case recently) and I'm making 2% on my saved money, the cash I have in there will be worth much less in real terms when I go to spend it.

Why would I want to devote more money to an investment that causes me to lose ground?

2. I can earn a much better return by investing

I don't want to keep more money than I absolutely have to in savings because I have better things to do with it. I want to invest it.

I have a brokerage account where I can deposit funds and put them into assets that can earn me much better returns than a savings account ever could. Specifically, I invest a lot of money into an S&P 500 index fund. This is a pretty safe investment that has provided an average 10% annual return over many decades. I would much rather earn 10% than 2% or less.

Now, I know I can't invest my emergency fund or the money I need for purchases in the short term, because an average annual return doesn't mean I'll earn 10% every year. In some years, my investment balance could decline. That's why I only invest money I won't need for at least two to five years -- so I can give it time to grow even if there's a bad year or two.

3. The money is too easily accessible

Another reason I don't like to keep too much in savings is because it's really accessible. The cash is just sitting there, and I could access it quickly without having to sell any investments.

While this is a good thing if I need to tap my emergency fund, it's not a good thing because it makes it too easy to justify taking the money out for something that isn't really necessary. I'm much less likely to sell investments and cause my portfolio balance to drop than I am to raid my savings account.

4. I'm not getting any tax benefits for putting money into savings

Finally, when I deposit money into savings, there are no special tax perks for doing so. I would rather invest as much as I can in a 401(k), IRA, or other tax-advantaged plan than put extra cash into savings.

For all of these reasons, my savings account balance is only as big as it needs to be -- and the rest of my money is elsewhere, working harder for me to help grow my wealth.

These savings accounts are FDIC insured and could earn you 14x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 14x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.

Two of our top online savings account picks:

Rates as of Jul 18, 2024 Ratings Methodology
Advertisement
American Express® High Yield Savings Citizens Access® Savings
Member FDIC. Member FDIC.
Rating image, 4.00 out of 5 stars.
4.00/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair
= Poor
Rating image, 4.00 out of 5 stars.
4.00/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair
= Poor

APY: 4.25%

Rate info Circle with letter I in it. 4.25% annual percentage yield as of July 18, 2024

APY: 4.50%

Min. to earn APY: $1

Min. to earn APY: $0.01

Our Research Expert

Related Articles

View All Articles Learn More Link Arrow