How to Know If You Have Too Much Money in Your Savings Account
With consistently high levels of personal savings, but low interest rates for savings accounts, you may be worried about carrying too much cash and losing the benefit of placing that money elsewhere. Let’s see how much money you should have on hand and where you can hide the rest.
Savings hit historic highs
While millions of Americans have been affected by job loss , COVID locks have also boosted savings for others, a trend likely to continue with the latest round of aid checks. The latest average personal saving rate rose to 20.5% in January from 13.4% a month earlier, well above the long-term average of 8.9% since the pandemic began (the savings rate has not been that high since World War II. ). And a recent Bloomberg poll reports that 34% of Americans plan to save their third cash payment, up 11% from the first $ 1,200 check that Congress provided in the early days of the pandemic.
However, there is a problem: With the Fed’s interest rates close to zero, it was difficult to find competitive savings rates as the national average for savings accounts is still just 0.09% . While it’s hard to object to investing more in your savings account, especially in a volatile economy, it can be a good time to focus on your other financial goals as well.
How much to keep in accounts and savings
If you’ve been fortunate enough to save money in the past five months, you might be wondering how much savings is too much. Answer: well, it depends on the circumstances. During times of uncertainty, you may prefer the extra savings cushion, especially if your or your partner’s job is less stable. However, there are a few rules of thumb that experts recommend.
“With the ongoing economic downturn, effective cash management is more important than ever,” says Corbin Blackwell, Certified Financial Planner at Betterment . She recommends keeping three to five weeks of living expenses in your checking account and at least three to six months in savings.
Once you reach these targets, Blackwell recommends that you ditch your savings account. For example, depending on your family’s goals, you might invest more in retirement, college tuition, or one-time expenses like a down payment on a house.
Unfortunately, short-term options like CD or short-term bond funds do not offer much higher returns than a savings account, so you may be tempted to invest in stocks. Stocks often have higher returns, but they are also much riskier with no guarantees that you will make money, so you will want to know your risk tolerance before considering this option.
This story was originally published in 2020 and has been updated on March 22, 2021 with updated context and new information.