A savings account is your best option for housing your emergency fund — money you might need for unexpected expenses, like unplanned home repairs. But a savings account might not always be the right account in all situations. Here are three reasons why it could pay to close yours.
1. A CD makes more sense for your situation
Maybe you have a separate savings account for non-emergencies, but your emergency fund is nice and complete. If that’s the case, and you don’t think you’ll need near-term access to your money, then you might as well close your savings account and transfer the funds into a CD instead.
The nice thing about CDs is that they guarantee you a certain rate on your deposit. With a savings account, your interest rate could fall with market conditions. So if you’re not worried about having to withdraw your cash early and take a penalty (which will usually happen if you tap a CD before it matures) because you’re all set with emergency savings, then a CD could be your best bet.
2. You were saving for a specific goal you’ve since met
Maybe you had money in a separate savings account for a down payment on a home. Or maybe you were saving to buy a car outright.Â
If you’ve met the financial goal you were saving for, then you may not want to keep a separate savings account open. You could run into issues for not meeting a minimum balance requirement, so why risk a fee or penalty for that?
3. You’re socking money away for a long-term goal you should be investing for
A savings account is a great option for a near- or mid-term goal. But it’s not a great place to put your money if you’re saving for a far-off goal, like retirement or college.Â
The reason? Even though you might earn 4% or more on your money in a savings account right now, today’s rates aren’t the norm. And even if they were, the stock market’s historical returns are much more impressive.
Over the past 50 years, the stock market’s average annual return has been 10%. So let’s say you have $10,000 you want to earmark for retirement. And let’s even say that you can get 4% on that money in a savings account over the next 40 years. If so, you’re looking at growing your $10,000 into about $48,000.
But watch what might happen with a stock portfolio instead. If you’re able to earn 10% on your $10,000 over 40 years, you stand to turn that sum into a little over $452,000. That’s a total you can potentially retire on, whereas with just a $48,000 nest egg, you’ll probably fall short.
There’s no need to keep a savings account open that isn’t serving a specific purpose. So if any of these situations apply to you, you may want to close your savings account — provided you also have another one open that’s housing your emergency fund.
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