Learning the ins and outs of money management can be tricky, especially for young adults who are just getting started. Often, they make changes to their savings habits that seem safe but end up costing them a significant amount of money.
MoneyLion spoke with Christopher Walsh, senior adviser and regional director at Capital Choice Arizona, to identify these changes and offer alternatives. Whether you’re a young adult or a parent guiding a child toward financial independence, it’s important to recognize these three mistakes and understand what to do instead.
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Consolidating Savings Into One Account Without a Specific Goal
It may make sense to keep all of your savings in one place, but without specific goals attached to the savings, it’s easy to get complacent or for goals to get jumbled.
If you’re saving for a car and a vacation, for example, and keep it all in one account, you won’t know how much you actually have for each expense. Walsh said, “If you’re saving for a trip, you need to know exactly where you’re going, exactly how much it costs, and whether your monthly savings rate can actually get you there in time.” If vacation savings are mixed with car savings, it becomes harder to tell whether you’re on track to meet your goals.
It’s OK if all your money stays in one account, just make sure to set up a spreadsheet or another way to track how much you’re saving for each expense.
Moving Your Savings Account to the Same Bank as Your Checking Account
Like consolidating accounts, keeping your savings and checking at the same bank may seem convenient. However, Walsh noted that this setup can make it easier to spend savings unintentionally. Every time you log in to your checking account, you’ll also see your savings balance.
“The temptation to dip into it for things that aren’t real emergencies is real,” Walsh said. “Out of sight genuinely is out of mind when it comes to savings, and keeping it at the same institution makes it too easy to rationalize a withdrawal.” Instead, consider keeping your savings account at a different institution. This can help reduce temptation and keep the money reserved for emergencies or specific goals — as long as you continue contributing to it.
Choosing a Savings Account Without Considering Interest Rates
This goes with the above change — moving the savings to the same bank as your checking account — but there’s a little more to this one. Not only is keeping savings and checking in the same bank a mistake, moving the money to another local bank, while it may feel safe, can actually mean a significant amount of interest lost.
According to Walsh, a standard savings account at a local bank may offer around 0.02% interest. With $10,000 saved, that would amount to just $2 per year. By contrast, a high-yield savings account offering 3.5% would generate about $350 annually on the same balance. Over time, that interest compounds, allowing your savings to grow more quickly the longer the funds remain in the account.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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