Towel storage is really a drying problem
Nobody complains about where towels live; they complain that towels smell. In a small, poorly ventilated bathroom, a towel that does not fully dry between uses develops that damp-laundry odor within about three days. So the right storage is whatever gives each towel the most airflow in the least floor space — and that ranking is not what most bathrooms are built for.
Hooks dry faster than bars, in practice
A bar dries a towel better in theory, because a spread towel has more exposed surface. In practice, almost nobody spreads a towel properly on a bar — it gets folded in half and hung in a thick wet fold that stays damp all day. A hook holds a towel in loose vertical folds with air moving between them, and it takes four inches of wall instead of twenty-four. In a small bathroom, give every household member their own hook at their own height and the smell problem largely disappears.
If you prefer the look of bars, choose a double or swing-arm bar so each towel gets its own rail, and hang it away from the wall by at least two inches so air circulates behind the fabric.
Own fewer towels than you think
Two bath towels and two hand towels per person, plus one guest set, covers almost every household. More than that and you are storing laundry, not towels. Fewer towels in rotation also means they get washed more often, which is exactly what prevents the musty smell in the first place. Retire anything that has stopped absorbing — over-softened towels repel water and never dry properly, usually because of fabric softener or dryer sheets coating the cotton. Strip them once in hot water with a cup of white vinegar, and if they still shed water, demote them to cleaning rags.
The rolled basket looks good and stores badly
A basket of tightly rolled towels is the classic small-bathroom photograph, and it is a humidity trap: rolled cotton in a humid room does not fully dry, and the towel at the bottom stays damp for days. If you love the look, use it only for clean, fully dry towels, put the basket outside the splash zone, and rotate the stack every week. Store the used towels on hooks, always.
Use the top of the room for clean stock
Folded clean towels belong high — a shelf above the door, the top tier of an over-the-toilet unit, a ladder rack's upper rungs. They are light, you reach for them a few times a week rather than daily, and up there they stay out of the splash zone. Keep only one spare set within arm's reach of the shower. Fold them the same way and stack them with the folded edge facing out, and even an open shelf will look deliberate rather than cluttered.
Give hand towels their own spot near the sink
A ring or a small bar mounted beside the sink, not behind it, keeps a hand towel dry and stops people using the bath towel for their hands. Mount it so the towel hangs clear of the counter edge; a hand towel resting on a wet countertop is permanently damp.
Ventilate, or nothing else works
Run the exhaust fan for fifteen minutes after every shower — a simple timer switch or a plug-in timer handles it automatically. Crack the door if there is no fan. All the hooks and bars in the world cannot dry a towel in a room sitting at eighty percent humidity, and airflow is the cheapest towel upgrade available.