Are You Making These 3 Savings Mistakes?

Saving money is an essential personal finance habit you want to build the right way. Having a healthy savings base achieves several things: It lessens your reliance on debt if an unexpected bill arises. And, it can help you build the discipline necessary to achieve your goals.

When used well, saving money can help you build a healthy financial foundation. However, there are also common mistakes you want to avoid.

Avoiding these mistakes ensures you're maximizing your gains and not leaving money on the table. Here's a look at some of the most common oopsies and ways to avoid them.

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Sitting your money in a low APY account

a slowly dissolving one hundred dollar bill

I used to have a brick-and-mortar bank, and I loved the customer service. Every time I walked in, I felt like I was on an episode of Cheers. Yet, a harsh reality hit every month when I received my statement. I was only earning pennies.

That wasn't going to build momentum. So, I switched to a high-yield savings account with an online bank. I earn an APY that helps me reach my goals quicker.

Here's a comparison: If I deposit $10,000 into a Chase savings account earning 0.01% APY for a year, I'm earning a dime. That's not optimal. However, by switching to Newtek Bank, I earn an APY of 4.20% APY. Over the course of the year, I'm earning $428.92. That's over a $400 difference in one year. And that will grow incrementally the longer I save.

Therefore, if you're keeping your money in a low-interest account, it pays to shop around. Use this Bankrate tool to find the best high-yield savings accounts for you:

Now, the thing about these savings accounts is that they come with variable interest rates. It means they could change at any time due to Federal Reserve or bank policy. So make sure to pay close attention to rates on occasion, and if they dip, use this tool to help you find a better option.

Along with being proactive about shopping around for savings rates, there's another critical factor you'll need to consider.

Placing too much money in a savings account

The smart rule of thumb is to save at least six months of living expenses in an emergency fund. That way, if you experience a job loss or a surprise medical diagnosis, you can cover your bills without relying on debt.

To determine your emergency fund, add up all your essential monthly expenses, such as mortgage payments, debts, utilities, prescriptions and household items. Once you have that total, set a savings goal to reach this amount using a high-yield savings account.

After you reach that goal, you'll want to adjust your strategy aside from other short-term savings goals you might have. Why? Savings can help build a healthy financial foundation, but investing builds wealth. Say you have an extra $40,000 you keep in a high-yield savings account for 20 years instead of investing it and earning an average annual return of around 8%.

The difference between these strategies is significant—almost $70,000. Remember that savings protect wealth, but investing builds it. You'll need both to achieve your long-term goals, so adjust accordingly once you reach your emergency target and short-term goals. And speaking of goals…

Not saving with a purpose

Many people save because they know it's necessary, but there's no direction beyond that intention. This can be problematic as aimless saving could lead to aimless spending. When you don't have a clear objective, that money can appear as "extra" cash, making it easier to justify impulse purchases.

Meanwhile, saving with a purpose means creating "sinking funds" for an expressed purpose. By assigning every dollar a job in your savings plan, you create a mental barrier against spending it.

Think of it this way: If you're earmarking money for a dream vacation in a year, you're less likely to splurge on an impulse purchase because you have a bigger goal in mind. Having a target keeps you focused, so a higher reward awaits you in the future.

Which savings account is right for your goals? Here's a guide that can help:

Swipe to scroll horizontally

Goal Category	Example Goals	Recommended Account Type
Emergency Fund	Job loss, unexpected medical bills, car repairs, home maintenance	High-yield savings account (HYSA)
Short-Term Goals (0-2 years)	Vacation, new appliance purchase, holiday gifts	HYSA or a certificate of deposit
Mid-Term Goals (2-5 years)	Down payment on a house, major home renovation, or starting a small business fund	HYSA, short-term investment account (e.g., brokerage account with low-risk funds), or CD ladder (which is where you open several CDs at differing times and lengths to optimize cash flow)
Long-Term Goals (5+ years)	Retirement, child's college education, building significant wealth	Tax-advantaged investment accounts (e.g., 401(k), IRA, 529 Plan), brokerage account
Specific Needs	Upcoming large tax payment, insurance deductible coverage	HYSA or a money market account (MMA) that works like a savings account with debit card privileges

Develop smart habits that benefit your future

Saving money is a smart first step towards building good financial habits. Recognizing and avoiding these savings mistakes can put you on the right path to maximizing your earnings and properly allocating them to reach your short-term and long-term goals.

Sean is a veteran personal finance writer, with over 10 years of experience. He's written finance guides on insurance, savings, travel and more for CNET, Bankrate and GOBankingRates.