The Hidden Downside of Leaving Lots of Money in Your Savings Account

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Even savings accounts have drawbacks. Read to find out when these accounts aren’t the best option. [[{“value”:”

I have some money in my savings account that I plan to put toward buying a house later this year. Having easy access to the money is important to me in case I find a home I’m interested in.

With many savings accounts paying a high interest rate, they’re generally a great place to keep your money. But there are some downsides to leaving piles of money in a savings account. Here are a few to consider.

1. Inflation can erode your money’s value

Inflation has wreaked havoc on Americans’ finances over the past couple of years. Even though it’s cooled down lately, the inflation rate is still at an elevated 3.3%.

For that reason, if your savings account isn’t paying a high annual percentage yield (APY), your money could lose value as it sits in the account. That may be fine if you’ve only got a little money in the account, but if you have lots of cash in your savings account, you could lose a lot of value every year.

Fortunately, you can fix this quickly by opening a high-yield savings account, many of which pay 5% or higher.

2. High-yield rates aren’t guaranteed

Many years ago I had a high-yield savings account that was paying far more than the average APY. One day, I received an email saying my interest rate was decreasing. A few months later, I got another email saying it was dropping again. This happened several times until my high-yield account was anything but.

This could happen to current high-yield savings accounts if and when the Federal Reserve begins cutting interest rates. While high yields won’t disappear overnight, you should know that they aren’t guaranteed, either.

3. Easy access can mean easy spending

I love having easy access to money in my savings account, but the potential downside is that piles of cash at your fingertips can be easy to spend.

If you’re the type of person for whom money burns a hole in your pocket, consider putting it into a brokerage account or certificate of deposit (CD). Your money will be less accessible in each. You’d have to sell investments to access cash in a brokerage account, and a CD will charge you a fee to take money out before the term is up. Both of these factors could discourage you from spending your savings.

4. You could earn more money elsewhere

Earning a 5% APY in a savings account is nothing to sneeze at. But if you’re aiming to earn as much money as possible on your cash, a savings account isn’t the way to do it.

The S&P 500 has a historical annual rate of return of 10.2%, more than double many of the highest savings account yields right now. Of course, these earnings are not guaranteed, but the long-term earnings potential is far greater with an investment account than with savings.

If you put $10,000 into a low-cost index fund that earned the historical annual rate of return of 10.2%, your money could be worth $26,412 in just 10 years. In contrast, the same amount in a 5% APY savings account would be $16,288 over that period.

I know what you’re thinking: “I could lose money in the stock market!” Yes, you could. But you could also be missing out on significant returns by leaving your money in a savings account.

5. You have to pay taxes on the interest

Just like with any other type of income, Uncle Sam will want his cut of your savings account earnings. Because of this, you’ll have to state how much interest you’ve earned in the account for the year when you file your taxes.

How much you’ll owe will depend on your income tax bracket, which can range from 10% to 37%, depending on your income. This isn’t a huge downside, but some account holders may not know this negative aspect of savings accounts and could be surprised by the IRS’s rules come tax time.

Don’t get me wrong, high-yield savings accounts are a great place to put your money. But it’s important to understand the downsides of leaving lots of money in one and how doing so can affect your finances.

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