This Financial Safe Haven Could Be Costing You a Fortune

Just because you can't lose money doesn't mean there isn't a risk to keeping your savings here.

With record inflation and stock market volatility, it can be tough to know what to do with your money right now. Those who have a little extra cash on hand probably want to keep it safe until they're ready to spend it. But sometimes, what seems like a safe bet can actually cost you in the long run. If your goal is to grow your wealth, here's one thing you definitely don't want to do with your savings.

Losing your money isn't the only thing you should be afraid of

Locking your money up in a savings account will ensure you don't lose any of it, as long as you keep your account information safe and stay below the FDIC insurance limit. And you'll probably make a small profit since most savings accounts enable you to earn interest on your balance. But some accounts offer a lot more interest than others.

Traditional brick-and-mortar savings accounts often have annual percentage yields (APYs) at or below the national average of 0.06%. If you put $10,000 into a savings account with a 0.06% APY, you'd only make $6 over the course of the year.

In the meantime, inflation is driving up costs rapidly. Over the last 12 months, costs have risen 8.3%. That means that $10,000 you put in your account today has the same buying power as $9,237 a year ago. And while we all hope the inflation rate slows, it's not going to disappear completely.

You may not be able to lose money with a savings account, but the $6 you earn in interest during a year isn't going to make up for the buying power you're losing to inflation. That doesn't mean there's no place for a savings account in your financial plan. But you need to use yours strategically.

So what else should you do with your money?

A savings account is the best place for you to stash your emergency fund and money you plan to use within the next few years. But rather than using a brick-and-mortar savings account, you should look for a high-yield savings account.

These accounts are exactly the same as a traditional savings account except they're offered through online banks and they have higher APYs. Some of the best high-yield savings accounts right now offer APYs up to 0.75%. And there's a chance they could climb even higher. Pre-pandemic, some savings accounts had APYs close to 2%.

A 0.75% APY will help you grow your wealth more quickly. That $10,000 balance from our example above would be worth $10,075 after one year -- about $69 more than what you'd get with a typical brick-and-mortar savings account. And over time, that difference will only grow larger because you'll start to earn interest on the previous year's interest as well as your principal balance.

If you don't expect to use your money within the next five years or so, you should consider investing it instead. Investing carries the risk of loss, but it can also help you beat inflation. You could earn a 10% return or even more in some years. And even if your investments take a dip, this is usually temporary. The stock market tends to go up over the long term, so as long as you don't need to pull your money out at a moment's notice, the day-to-day fluctuations in share prices shouldn't concern you too much.

What about your old brick-and-mortar savings account?

If you decide to cut ties with your old brick-and-mortar savings account, you can either hold onto it as a backup or close the account and move your money to a high-yield savings account instead. Those who have automatic bill pay set up should make sure they update their account information so they don't wind up with any late payments.

It might take a little work to move all your money around, but it's worth the effort. You'll be able to earn more on your money this way, and that will help you stretch your savings further in the future.