Here's What Happens When You Choose the Wrong Type of Savings Account


Picking a savings account may seem like a simple task — just go to a bank and sign up. But the reality is, there are a lot of different kinds of savings accounts, including standard accounts, high-yield accounts, and more specialized accounts like certificates of deposit (CDs).

If you pick the wrong one for your money, you could end up regretting it, so you don’t want to make this mistake. Here’s what could happen if you select an account that’s not well-suited to your needs.

You could miss out on interest

Different kinds of savings accounts pay different interest rates. For example:

  • The national average interest rate on a savings account is 0.47%.
  • High-yield savings accounts could pay rates as high as 5.32%.
  • National average rates on a 1-year CD are 1.86%
  • The best 1-year CD rates are as high as 5.50%

Not surprisingly, there’s a really big difference between earning 0.47% interest on your money and earning 5.50% or higher. The table below shows just how much interest you could earn in one year if you had $5,000 in savings, based on these different rates.

Rate 0.47% 1.86% 5.50%
Earnings $23.50 $93.00 $275

Table calculations: Author.

You don’t want to miss out on nearly $300 just because you picked the wrong place to put your savings. So, you probably wouldn’t want to leave your money in a standard savings account when high-yield options are available.

Many experts also speculate that the Federal Reserve will reduce interest rates this year, which could result in high-yield savings accounts dropping their rates — since they fluctuate over time with market conditions. With a CD, though, your rate is locked in for the duration of the term once you open the CD account. So if you don’t need to withdraw funds from it before the 1-year term expires and you want to make absolutely sure you get paid at this high rate, a CD may be the right place for your savings.

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You could end up not being able to access your money when you need it

Choosing the wrong type of savings account could also cause you another — perhaps even bigger — problem. If you pick the wrong kind of account, it could become more difficult and expensive to access your money.

With a CD, for example, you have to commit to leave your money invested for the duration of the CD term or you could face penalties. If you may need the funds you have saved because they are for emergencies or big purchases, you could end up losing money if you pick a CD.

Likewise, some banks limit the number of savings account withdrawals per month, even though a government regulation limiting you to six penalty-free withdrawals is currently suspended. If you accidentally pick a bank that prevents you from accessing savings often and you need to make regular withdrawals for some reason, this could be a problem.

To make sure you don’t make the mistake of choosing the wrong kind of savings account:

  • Define your goals for your savings. If you need the money accessible, a high-yield savings account is usually the best place for it. If you don’t need it right away and want to maximize your return on investment and lock in a guaranteed high interest rate, a CD may be best.
  • Research the account terms. Check the fine print to see how often you can withdraw money, when or if you’d be penalized for withdrawals, and whether your rate can change over time.

By taking these steps you can get the account that’s best for you and you won’t lose out.

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