This is a partner story from Stash Invest, a digital platform and mobile app that simplifies saving and investing for your future.

We all agree that saving money is important. But is your savings account the best way to save for everything?

It may be hard to believe but using your savings account the wrong way can actually end up hurting your finances.

We explain it.

1. Don't use it to park all your cash

While it's a good idea to keep some cash in a savings account – it's quick and easy to access in case of emergencies, after all – it may not be the way to plan for the future. But here's the thing: with interest rates as low as they are, keeping your cash in a savings account is akin to stuffing it in a mattress – at least as far as earnings are concerned.

Here's a better idea. Keep enough in cash in your savings account to cover emergencies and to create a rainy day fund. Got a specific expense you're saving for, like a vacation? That's a great place to sock away money. But if you're saving for a long-term goal, consider investing the rest in stocks, bonds and/or ETFs that match your risk profile.

2. Pay attention to interest rates

Promotions are great. Too bad they don't always last forever. One savings account may appear to boast a high interest rate, but watch out – a lot of banks offer great introductory interest rates, only to lower them after a few months.

Before opening an account, make sure you know the true interest rate, and for how long that rate will be in effect.

Super important! Fees. Many banks charge a set fee each year – say, $25 – plus an additional amount each month that your account falls below a certain balance. Does your account charge for the number of withdrawals you can make each month? Or require a minimum balance? Then you are likely being hit with a withdrawal penalties.

If you have a small balance to begin with, these fees and withdrawal penalties could wipe out your account in a matter of months. Not good.

3. Inflation, inflation, inflation

Quick explainer: $10 doesn't buy you as much as it did 20 years ago. Why? That's inflation at work. With today's interest rates, it doesn't make sense to hedge against inflation by storing your money in a savings account.

Here's why: Assume you have $100 in a savings account that pays a 1% interest rate (pretty standard these days). After one year, you'll have $101. Meanwhile, the inflation rate in the U.S. is projected to hit 2%, which means you'll need $102 to compensate for the higher prices of goods and services.

With only $101 in your account, you will have actually lost some purchasing power by keeping your money in that low-interest account. That's bad.

Consider this. There are places to put your money that are still relatively low risk, but that offer the potential for better earnings,helping you to ease the inflation burden.

Investments like exchange-traded funds (ETFs) can be useful to help you battle the forces of inflation. Because ETFs are "baskets" of securities (as opposed to just a single stock), investors can effectively spread out their risk across companies, industries, sectors and even parts of the world.

Important to note! Diversification, while a great strategy, is not a guarantee that your investments will be protected in a down market.

4. Don't use it like a checking account

Save it, keep it, don't withdraw it. Savings accounts can provide a safe place to keep your money while you save for future expenses – whether that's a trip to Paris, a rainy day fund or a down payment on a car. But if you use your savings account like a checking account, you may have a hard time ever reaching your savings goals.

Once you deposit money into your savings account, do your best to keep it there until you reach your goal. If you have trouble leaving that money alone, consider opening an account that isn't linked to your checking/ATM/debit accounts so it will be harder to access for those impulse buys.

5. Don't use it to plan for your retirement

Your savings account is probably not the best way to save or your later years. That's because the interest you earn in a savings account may not be enough to help you grow your nest egg.

Here's a better way to think about saving for retirement. Let's start with an example.

Let's say you tart with $1,000 in your savings account and add $500 a year for 25 years. Assuming a 1% interest rate, your account balance would be $15,545 after 25 years – $2,045 of which would be earnings.

Now, start with the same $1,000, but put that money in a tax-advantaged Roth IRA.

If you contribute the same $500 a year and earn a 5% (a realistic goal for IRAs), after 25 years, your account balance would be $28,443 you would have earned nearly $15,000 – more than seven times what you would have earned by keeping your money in a savings account.

Max out your contributions each year ($5,500 for 2017) and you'd have $279,000 after 25 years or more than $1.2 million after 50 years. That's a really good reason to open an IRA today.

*To note: the above examples are a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy

Yes, there are other ways to save for your future

Now you know that your savings account is a handy tool for some savings goals but not for all of them. Investing in the stock market could be an effective alternative to save for your financial goals, provided you follow a long-term and consistent investment strategy. However keep in mind investing involves risk, including the possibility of losing your entire investment.

Thanks to technology and innovation, the Stash Invest app helps you start investing in the stock market with as little as $5. In fact, Stash Learn is giving new users a special $5 sign-up credit to get started by just subscribing here. The app is also free to download for iOS and Android!

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Disclaimers

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented.Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome.

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Written by Stash Invest January 25, 2018

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