10 scary savings mistakes and how to avoid making them

Gather around – yes, closer – for a spooky tale about your money and your financial future. It begins with these hair-raising stats:

• More than half (59 percent) of U.S. adults say they’re “uncomfortable” with the amount of savings stashed in their emergency funds.
• More than one-third (36 percent) say they have more credit card debt than emergency money.
• Nearly one-fourth of Americans (27 percent) say they have no emergency savings at all!

BOO!

Granted, these results from Bankrate’s 2024 Annual Emergency Savings report may not be as frightening as seeing Freddy Krueger in your nightmares or Norman Bates standing by your shower with a knife, or for that matter being chased by a chainsaw-wielding maniac. Despite the recent easing of inflation and interest rates, many Americans are still making savings mistakes that are, well, Pennywise and pound foolish. What’s more, they’re liable to keep savers up at night just like visions of a certain clown of the same name.

Fortunately, there are solutions to these savings mistakes that can help one sleep tight at night, even through the sounds that go bump in the night. Read on to learn how you can avoid these 10 scary savings mistakes.

Prologue: The often-cited savings mistakes

It’s bad enough that people are prone to making the same mistakes more than once, even more so when it comes to matters of the pocketbook. As previously reported, the common savings mistakes that keep reappearing like a ghost in an old mansion:

• Not having enough money saved for retirement: In a recent Bankrate Retirement Savings Survey, 57 percent of working Americans surveyed – from gig to full-time workers (and even those who are temporarily unemployed) – said they feel behind on their retirement savings. Around 1 in 3 said they need more than $1 million to retire comfortably.
• Not having enough money saved in an emergency fund: An emergency fund is designed to provide a cushion for your finances to cover unexpected expenses – up to six months’ worth. Among other findings in Bankrate’s emergency fund report, nearly one-third (29%) of Gen Zers (ages 18-26), and 16 percent of baby boomers (ages 59-77), said they have no emergency savings at all.
• Paying unnecessary fees in a savings account: From excessive withdrawal fees in a savings account to early withdrawal penalties in a certificate of deposit (CD), fees can eat into your savings. And in the case of CDs, they can cannibalize the interest you’ve earned.
• Saving your cash in a low-yielding savings account: Many banks, including the 10 biggest banks in the country, offer savings accounts with slim-to-none annual percentage yields (APYs), typically between 0.01 percent to 0.10 percent APY. Compare that with a high-yield savings account with a 4.50 percent APY at an online-only bank.
• Stashing – and keeping – your cash in a checking account: The average American has nearly $5,000 stashed in a checking account, according to a 2018 survey. Even if you have a rewards checking account that pays upwards of 3 percent APY, your money can earn much more in a savings account.
• Borrowing from your retirement savings: Using long-term savings to cover short-term debts can come back and haunt you. Borrow from a 401(k) in your 30s and you might have fewer savings to grow — and benefit from — by the time you’re in your mid-60s.

10 scary savings mistakes

But there are other major savings mistakes that can be a nightmare for your personal finances. And it’s these systemic mistakes that can result in money woes that will haunt you for years to come.

1. Fear of saving

As that tried and true saying goes, “The only thing we have to fear is fear itself.” But when it comes to managing your money, fear can be costly in terms of lost interest as a result of not putting your money in an interest-bearing savings account.

One persistent fear is the feeling that you don’t have enough money to deposit in a savings account. Although there are accounts that require a minimum deposit to open – be it $100 or $1,000 – there are others that require no minimum amount, much less charge fees to manage your money.

What’s more, there’s no set limit on how much you can add to your savings at any time. Fortunately, what you put in, albeit small, can add up. “People think that [saving a little] isn’t going to make a difference, but even $10 saved every payday, especially if you have a spouse or partner that saves, will get you to $50 a month, or $600 a year,” says Marguerita Cheng, CFP, chief executive officer at Blue Ocean Global Wealth. “It may not sound like a lot, but then you start to pay things off.”

Cheng has helped her clients overcome seemingly insurmountable financial hurdles. She highlighted one couple she’s worked with for 23 years that started out with credit card debt and no savings. Each one started by saving $10 every pay period. They followed a path of saving steadily and consistently over the years. Their savings started compounding monthly, resulting in them paying off their debts. “They paid off their student loans, their credit cards, bought a house, had two kids, started a 529 plan – they did all that,” she says. And it started with saving just $10 a pay period.

Overcoming the fear of saving begins with understanding what it is, and what types of accounts are available.

For starters, the four major types of savings accounts offered at most banks and credit unions are:

• Standard savings: An account that enables you to deposit your money and will usually earn a low-to-modest amount of interest.
• High-yield savings: A savings account that pays a much higher APY. These accounts are typically offered at online-only banks.
• Money market account (MMA): Similar to a savings account, an MMA tends to offer check-writing privileges and ATM access to your savings, although the number of withdrawals may be limited monthly.
• Certificate of deposit (CD): A timed savings account that earns interest on your money for a set period of time, typically ranging from three months to five years or longer. CDs typically pay a fixed rate of return for the duration of the term.

Each of these accounts is insured for up to $250,000 per depositor, per ownership category at federally insured financial institutions. For banks, it’s the Federal Deposit Insurance Corp. (FDIC) and for credit unions, it’s the National Credit Union Administration (NCUA). Before opening an account, be sure to look for either the FDIC or NCUA logos.

Solution: Once you’ve established a savings account, start simply and lightly. Cheng suggests saving as little as $10 per pay period, then building it up once you gain more momentum. Of course, your financial goals will help you determine how much to save. One popular approach is the 50/30/20 rule whereby you allocate 50 percent of your monthly income for essential expenses (such as housing, groceries and gas), 30 percent for items you want to spend on and 20 percent devoted to savings.

2. Not taking advantage of saving at an early age

It seems preposterous, but it’s not unusual for some people to think that they can put off their savings for later in life. In fact, saving has been a hard sell for many teens as well as young adults who are just starting out as they spend on such major expenses as rent, food and entertainment. But it’s worth the effort to start young if you can.

For example, let’s say you’re 20 years old and either saved or received a gift of $1,000. If you deposited that money in a high-yield savings account at a 5 percent APY, adding $100 a month, with interest compounding daily, you’ll have saved more than $225,000 by the time you retire at age 66, according to Bankrate’s savings account interest calculator. But if you delayed that same investment starting at age 40, using the same terms, you’ll have saved only $67,724.

Solution: To get started on the savings track early, open a savings account at a federally insured bank or credit union. Whether you’re setting money aside for an emergency fund, the downpayment for a major expense or planning for a vacation, a federally insured interest-bearing savings account is the place to park your reserved cash. Obviously, one of the important criteria for a savings account is whether it has a competitive APY.

Although the national average for savings accounts is currently a mere 0.57 percent, many top-yielding savings accounts still offer APYs north of 4 percent, some even higher than 5 percent. The same can be said for high-yield savings accounts which, as the name suggests, provide an even higher return on your savings.

But keep in mind that interest rates for these savings accounts are linked loosely to the rates set by the Federal Reserve. So, if the Fed raises interest rates, banks and credit unions will tend to pay more interest on savings accounts to stay competitive while attracting more deposits (online-only banks are the most competitive and rewarding). Conversely, if the Fed lowers rates, as we’re experiencing now, financial institutions will pay less interest on savings accounts.

For early savers, now’s the time to learn about the power of compounding. Simply defined, compound interest is what you earn on interest. That means if your savings account compounds interest, you’ll earn interest on the principal (the initial amount deposited) and interest on the interest that accumulates over time.

Fortunately, many savings and money market accounts pay compound interest, whether it’s daily, monthly or semi-annually. When searching for savings accounts, look for those that compound daily to help supercharge your savings.

3. Not participating in a 401(k) match at work

For many in the professional workforce, a 401(k) is regarded as an assumed benefit, often lumped in the same sentence as healthcare and paid time off. It’s a tax-advantaged retirement savings plan companies offer that enables their employees to contribute an amount of their salary up to a certain amount each year. What’s more, many employers go the extra step to match 401(k) contributions up to a defined portion of one’s salary, usually up to as much as 5 percent. 

But don’t take this major work benefit for granted. In fact, a 401(k) with an employer match is a powerful tool to use when building the nest egg you need for a comfortable retirement. “It’s free money,” Cheng says enthusiastically because the company is giving you that money for the sole purpose of contributing to your retirement.

As a further incentive, many companies are offering 401(k) plans with matching contributions to part-time employees. Cheng notes that even her daughter is receiving a 401(k) plan with an employer match at her part-time job, a clothing retailer, where she works 10 hours a week.

Solution: Although a 401(k) plan is a standard benefit offered by the majority of U.S. employers, it’s imperative to take full advantage of it as you build your savings for retirement. Even if you’re working on a part-time basis at a company that offers it to you with a match, take it! If you’re fearful of losing it when you switch jobs, don’t, because you have options to keep it alive when moving to another employer. You can either roll it over to an individual retirement account (IRA), keep your money in the employer’s plan (if allowed) or roll it over to the new employer’s 401(k) plan (if allowed).

4. For gig workers/self-employed: Not having enough money saved for paying taxes

For many Americans, earning a comfortable living, or just making ends meet, requires more than just a nine-to-five job. Some start their own businesses, others work as freelancers, while yet others supplement their full-time jobs with a side hustle. Regardless of the type of work, there’s one aspect of self-employment and gig work that you can’t avoid: paying taxes on your earnings.

Being your own business, or taking on a side hustle, is more than just a way to make ends meet. For many, it represents a legitimate business that requires proper organization, financial management, marketing yourself as a brand and documentation. A business bank account from a federally insured bank or credit union is one means to help you get your financial ducks in a row, so it’s easier to manage your finances and allocate the money you need to save for Uncle Sam.

Solution: Use Bankrate’s self-employment tax calculator to help you determine how much you owe in taxes from self-employment and side hustle work. And set up a business account from an insured bank to better manage and track your money.

5. Saving money at the same financial institution as your checking account

Opening a savings account at the same bank or credit union as your checking account might seem convenient, safe and a gesture of bank loyalty. After all, what can you lose by depositing your savings at, for example, a major bank you already do business with that has nationwide reach, branch banking and online services? Actually, the question you should ask is: “What do I fail to gain?” The answer could be hundreds, maybe even thousands, of dollars each year.

Many so-called traditional banks and credit unions with physical branches, tend to offer savings accounts with low APYs. Bank of America, one of the nation’s biggest banks, for example, currently offers its Advantage Savings Account with an standard APY of a minuscule 0.01 percent APY. If, for example, you have $10,000 of savings in that account, you’ll earn a whopping $1 in interest after one year. Compare that with a savings account at an online bank such as EverBank that offers a 5.05 percent APY, and that same $10,000 earns you $505 at the end of the year. Ergo, the higher the APY, the higher the payout from the bank.

Although some major banks can offer competitive interest rates on their savings accounts, online banks and credit unions tend to have the advantage of offering higher rates and yields (not to mention lower fees) partly because they don’t have to pay the overhead costs of maintaining physical branches, passing the savings on to customers. 

What’s more, major banks don’t need the business of deposit accounts as much as online banks do. And if an online financial institution is insured by either the FDIC or NCUA, then you have added peace of mind knowing that your money is safe.

Solution: Don’t limit your banking experience to the same place you do your checking. Consider other banks, especially online banks, and credit unions that offer savings accounts with higher, more competitive APYs and better terms. Also, consider other higher-yielding deposit accounts, such as CDs, money market accounts and high-yield savings accounts. Remember: You’re in control of your finances, not your bank.

6. You’re oblivious to the terms of your savings accounts

In addition to “unsuspecting” fees – be it management fees, overdraft fees or early withdrawal penalties on CDs – there’s a persistent assumption among consumers banking at one bank that both their checking and savings accounts pay the same yield. Worse yet, some people don’t know what the APY is on their savings account.

“It has been said that the ‘devil is in the details,’ but when it comes to maximizing return on savings and avoiding potential punitive fees, it turns out that the devil is in being unaware of the details,” says Mark Hamrick, senior economic analyst for Bankrate. “Why part unnecessarily with your money, or pay fees or penalties that you can avoid? These are cases where knowledge is more than power, it can translate to money in the bank.”

Solution: Not knowing what you don’t know is scary, but not knowing how your money is managed can be downright costly. Take the time to read and understand the terms of your savings account, including withdrawal limits, maintenance fees, minimum deposit requirements and early withdrawal penalties on CDs.

7. Simplifying your savings too much

In the tradition of mistakenly doing all of your banking at one bank, another savings mistake is oversimplifying your savings by not taking advantage of other accounts that offer higher APYs than traditional savings accounts, such as CDs, money market accounts and high-yield savings accounts.

Bankrate’s Hamrick contends that while there’s buzz about the still high cost of borrowing in today’s high, but declining, interest rate environment, the flip side of the situation is we’re still seeing high returns on savings. “By investing just a little time to find optimal savings solutions and options, one can truly yield a superior return,” he says.

But what goes up, must come down, and interest rates are no exception. At its Sept. 18 meeting, the Fed announced that it lowered the range of its key benchmark federal funds rate by half a percentage point, or 50 basis points, as inflation retreats close to its target rate of 2 percent, among other economic trends. 

A CD, however, is a fixed-rate savings account, so if you lock in a high-yielding rate on a five-year CD now at, say, 4 percent APY, you’re guaranteed to receive that yield over the course of the CD’s five-year term, even when interest rates were to drop to, say, 2 percent in two years.

Solution: Diversify your savings and take a proactive approach to researching the right deposit accounts for you. To combat lower rates, consider a longer-term CD. “We don’t know how long returns on savings will remain at their current levels, but by lengthening duration on a CD, locking in is an option,” says Hamrick. “One must be comfortable living with that longer term, meaning that the funds won’t be needed for that period of time.”

8. Not putting your savings on autopilot

It may seem counterintuitive – even, downright wrong – but there are times when it pays to take your eyes off your money. Sure, it can be a challenge to get into the routine of saving your hard-earned cash often and consistently, but if you can swing it with your bank, it’s possible to automatically move some of your paycheck directly to your savings account.

“The biggest barrier to saving is not being in the habit of saving. Successful saving is all about the habit,” says Greg McBride, CFA and chief financial analyst for Bankrate. He says it can be a simple matter of setting up direct deposit from your paycheck into a dedicated savings account, have an automatic transfer from checking to savings and have it happen without thinking about it as it’ll build up over time in the background. “If you wait until the end of the month and try to save what’s left over, too often there’s nothing left over. And even when there’s no consistency to that, it varies one month to the next,” McBride cautions.

Solution: Take advantage of automatically transferring some of your money into savings. Several reputable, and reliable, money-saving apps, such as Oportun, Qapital and Goodbudget, can help you set it and forget it, while offering solutions, tools and strategies to encourage you to save. In most cases, all it takes is a checking account, a smartphone and, of course, money. But use your best judgment: Keep an eye on what’s going on with your money. Sometimes it’s worth taking a peek to see how your savings account is growing.

9. Retirees: You’ve stopped saving IN retirement because you’ve stopped saving FOR retirement

You’ve spent most of your life setting aside money in savings accounts, 401(k)s and researching the right investments to grow your nest egg. Congratulations, you made it! Time to kick back, relax and do the things you’ve been wanting to do most of your working life. But what happens when you live a long life in your retirement years with fixed funds? Your dream life of bliss after work can turn into a tale of financial horror when you realize that you’ve outlived your money.

“Here’s the thing about saving, whether for emergencies or for retirement: I have yet to hear anyone say that they’ve saved too much money,” says Hamrick, who notes that broadly speaking, we’re a society that under-saves. “For those who are inclined to take action, remember this is the long game that we’re talking about because saving money is something that we’ll need to do for as long as we’re breathing,” Hamrick adds.

Solution: Saving, even in retirement, doesn’t have to be an uphill battle. For starters, you can build an emergency savings fund, catch up on retirement savings and consider a variety of options such as a high-yielding CD to sock money away over a term you’re comfortable with.

But why stop there? If you’re financially secure and want to help, say, your grandchildren lay the foundations of their financial future, consider setting up a savings account for them. “This can help them to achieve their personal financial goals, perhaps diverting some of their funds to other productive uses,” Hamrick says.

Of course, you can always consider a part-time job or side hustle doing something you love.

10. You feel obligated to pay ALL of your debts first, then save

A lot of people have fallen into this trap: You’ve amassed debts, lots of debts – from student loans, credit cards, car loans, even a mortgage – just to establish yourself and make it in the real world. But when those debts accumulate and come due, how can you think about saving money? The answer is, you should.

Whether it’s as little as $10 per pay period, $100 a month or a few hundred dollars from a financial windfall, having money set aside despite mounting debt can be the very thing to rescue you from financial ruin. Cheng notes that by focusing only on paying down debt and not having anything saved, “you won’t have anything to fall back on.”

She recalls a time when one of her clients, who was in the middle of a difficult divorce, had a car emergency that required her to use her credit card, racking up more debt than she felt comfortable, adding more financial anxiety. Fearful of not being able to pay for the repair, her emergency savings helped her realize that she could handle the expense and was relieved that her emergency money helped save the day.

Solution: There’s no shame in having debt, be it credit card, student loan debt or a mortgage. Of course, it’s important to pay down high-interest debts first – consistently and on time – and as best as you can. But when life gets in the way, having money saved in the event of an emergency, and not being afraid to use it, can be a lifesaver.

Bottom line

When it comes to managing your money, there’s nothing scarier than being caught off guard without it. Let’s face it, fear is a powerful emotion, and letting it dictate the way you manage your money can limit your ability to live the life you want to live.

Don’t be afraid to save. Take advantage of saving early. Take advantage of a 401(k) match by your employer. Have money from any side work ready for taxes. Diversify your savings among various accounts and at various banks. Be aware of the terms of your savings accounts. Put your savings on autopilot. Don’t stop saving, even when you’re retired. And, above all, don’t wait to save after paying off your debt.

Sweet dreams.