You know that saving money is a good idea. Building your savings can help you plan for emergency expenses and afford large expenses like a wedding, home purchase or vacation.
However, you could be sabotaging your savings efforts by making one -- or more -- common mistakes. These mistakes can prevent your money from growing as fast as it could or chip away at the interest you've already earned.
Thankfully, there are plenty of ways to avoid these pitfalls and maximize your savings. The first step is knowing what not to do.
Don't make these 8 common savings mistakes
Make the most of your savings by avoiding these slip-ups.
❌ Putting your money in the wrong account
If your money isn't earning much interest in its current account, you're missing out. Traditional savings accounts have annual percentage yields, or APYs, that can be as low as 0.01%. There are plenty of other places to put your money where you could earn 5% APY or more:
- High-yield savings accounts: High-yield savings accounts can earn 10 times the national average savings rate (or more). Like traditional savings accounts, they offer you flexible access to your money, making them great for emergency funds you may need at any time.
- Money market accounts: A money market account combines the benefits of a checking account and a savings account. You can easily access your money -- and even write checks -- while earning more interest than you would with a traditional checking account. Some of the best money market accounts offer more than 5% APY right now.
- Certificates of deposit: With a certificate of deposit, you earn a fixed interest rate in exchange for keeping your money in the account until the term ends. Terms typically range from six months to five years. This gives you a guaranteed return on money you won't need immediately, making CDs ideal for savings goals with a set timeline, such as buying a house.
- Series 1 savings bond: Savings bonds are issued by the US government and are designed to protect your money from inflation. The I bond rate currently sits at 4.28% and is adjusted periodically to account for inflation. However, you must hold a savings bond for a set period, so you won’t have ready access to your money. You can buy I bonds at TreasuryDirect.gov or by submitting paperwork with your federal tax returns.
❌ Paying unnecessary bank fees
If you don’t pay attention to your bank account, you may be racking up unnecessary fees. In college, I had a student banking account that was free, but when I graduated, the bank automatically started charging monthly maintenance fees. It took me a few months to notice, and in the meantime, I was losing money.
Here are some common bank fees you can avoid if you do your research:
- Overdraft or nonsufficient funds fee: When you try to withdraw more than you have in your account, you can incur a fee. An overdraft fee occurs when the bank covers the transaction when you don’t have the funds in your account. An nonsufficient funds fee occurs when the bank can’t process a payment because you don’t have enough funds. Avoid these fees by setting up overdraft protections when your bank provides them. Monitoring your account balance can help you keep track of how much you have to spend. You can also look for a bank with reduced or no overdraft fees.
- Maintenance and minimum balance fees: Some banks charge a monthly fee for holding an account. This may be standard for the account, or you may incur a fee when your account goes below a certain amount. Look for no-fees savings accounts to avoid paying unnecessary fees.
- Excessive transaction fee: Some accounts only allow a certain number of transactions per month. If you go over this number, you may pay a fee.
- Early account closing fee: Banks typically require you to keep an account open for a certain amount of time -- usually at least 90 to 180 days after opening it. If you close your account before the period ends, you may have to pay as much as $25.
These fees may be small, but they can add up. And the money you pay toward fees could be used to increase your savings. Do your research to find bank accounts with the fewest fees so you can optimize your savings.
❌ Not building a big enough emergency fund
Emergency expenses can come out of nowhere, and you may have more than one at once. Whether they're unexpected medical bills, an emergency home repair or a hefty bill from the mechanic, it’s important to be prepared by building a healthy emergency fund.
Experts recommend saving enough to cover three to six months of essential spending, such as groceries, housing payments and gas. You may need to save more if you have a large family. But however much you have to set aside, every little bit helps. These tips can help you boost your savings.
❌ Keeping too much money in your checking account
When you let all your cash sit in your checking account, you're missing out on the chance to grow your savings faster. Leaving a large sum in a checking account doesn’t allow you to earn any interest.
If you have some money you don't need to cover regular expenses, put it in a high-yield savings account so it can earn interest and increase your savings balance. For cash you need for everyday spending, use a high-yield checking account. While you won’t earn as much interest as you would with a high-yield savings account, you'll still be earning something.
❌ Thinking you don't have enough money to save
No amount of money is too small to save. Even if you just set aside $20 per week, your money will multiply thanks to the magic of compound interest. And the sooner you start saving, the faster it will grow.
❌ Delaying savings to focus on debt payoff
Paying off debt is important. If you have outstanding balances accruing interest, you can end up paying several times the amount you initially borrowed. However, having some savings set aside is important too.
Without savings to fall back on, you could end up going into more debt to cover unexpected expenses. Balancing debt payments and savings can help you be better prepared for emergencies.
❌ Not automating your savings
It's hard to grow your savings if you forget to contribute or have trouble maintaining the discipline to put cash aside each month. Automating your savings means your designated amount goes into a savings account regularly without you having to do anything.
Automating your savings also allows you to customize your savings plan. You can use tools from your bank or a budgeting app to automatically move money from your checking account to your savings account on a regular basis. You can choose how often this happens and how much you transfer and adjust as needed.
❌ Neglecting retirement savings
Putting money aside for short-term goals is important. But don't forget long-term goals such as retirement. You shouldn’t rely on Social Security alone to support you after you stop working. Allocate some of your money to a retirement account like a 401(k) or IRA, and take advantage of any matching programs your employer offers.
Saving for retirement doesn’t have to be complicated. You can balance your short-term savings and retirement goals by using tools like robo-advisors.
The bottom line
Knowledge is power. By knowing the common mistakes to watch out for and how to avoid them, you can maximize your savings, protect yourself from emergency costs and reach your financial goals faster.
