savings

The hidden costs of savings accounts

Piggy bank savings
Highlights
  • Savings accounts offer more liquidity, but come with some costs.
  • Watch out for high introductory rates on accounts that later drop.
  • Ask about annual or minimum-balance fees before opening an account.

They offer security for your funds as well as greater liquidity, but traditional savings accounts come with significant costs, too. In exchange for the freedom to pull funds out on a whim, savings accounts can burden consumers with low return rates, hidden fees and surprise penalties.

Here are four reasons to consider stashing your cash someplace other than a savings account.

Opportunity cost

The major loss that savings account holders face is simply not getting higher returns on their money. With the largest banks currently offering around a half-percent in interest, consumers will gain greater returns in almost any other savings instrument.

"With the current interest rate environment, it's basically the same thing as storing your money under a mattress," says Hollis Colquhoun, co-author of "Women Empowering Themselves: A Financial Survival Guide."

"If your money is just going to sit there, consider placing it in a variety of mutual funds and securities. If you need the liquidity, look at online banks with higher interest rates," she says.

While some banking institutions have rates well below 1 percent, many online institutions offer savings accounts with more than double the interest rate. Colquhoun says that account holders also need to be aware of how their interest is compounded. Most banks compound interest daily and pay out monthly. However, a few compound much later -- monthly or even quarterly -- significantly reducing your returns.

Teaser rates

The savings account with the highest interest rate may not pay off the most in the end. For example, an institution may offer a high introductory rate of 2.25 percent on their online money market accounts. However, after the first three months, the rate drops to 0.75 percent. Before signing onto a savings account, consumers should do their homework, says June Walbert, a Certified Financial Planner with USAA Financial Planning Services in San Antonio.

"You need to ask about what the bank will pay on your account and how long that rate is good for," Walbert says. "Ask them to run some numbers for you. If they can't give you a mathematical example about how much interest you will accrue over a certain period of time, move to another bank."

advertisement

To combat low return rates, Walbert advises consumers to check out banks that offer a cash bonus for opening a savings account. With current interest rates so low, a modest $50 bonus is the equivalent of 10 years' worth of returns on a $1,000 savings account with a 0.5 percent interest rate.

 

Show Bankrate's community sharing policy
          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

Ask Dr. Don

Quickest path toward $1 million?

Dear Dr. Don, This question involves how best to make for a better life for my family. How can I make a one-time investment of $5,000 grow into $1 million or more over 60 years? One of my broader goals is to encourage my... Read more

advertisement
Partner Center
advertisement

Connect with us