Yes, It’s Possible to Have Too Much Money in Your Savings Account.
Money is strange. Almost everyone in America thinks they are middle class, which obviously can’t be true, but it highlights how poor most people are, even those who supposedly make good money. The fact is that 58% of Americans say they live paycheck to paycheck, which is bad, and 53% say they have exactly zero dollars in emergency savings, which is even worse.
We should all have about six months’ worth of expenses saved up (though the actual amount of your emergency fund depends entirely on your actual needs), and this quest to save for a rainy day usually starts with a savings account or two somewhere. where you can leave your money is safe, accessible, and at least vaguely indicates that it will pay you interest. But putting money into your savings account is just a good idea: Savings accounts are terrible investments, with average interest rates well below half a percentage point, well below inflation. High-yield savings accounts often perform better, but not by much. This means that while having a savings account is a good idea, you shouldn’t have too much money in it.
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Why is having a fat savings account a bad idea? Look at those interest rates again: If you’re earning 0.5% on your savings, you’re actually losing money because the current inflation rate is 3.7%. If you have a high-yield account, you may be beating inflation for now, but those interest rates will change pretty soon, and beating inflation by 1-2 points is still much less than your average 10% return. I will invest this money.
You should aim to have enough money in your savings account, but not too much . How do you know if you have too much?
Exceeding the limit
First, the simplest metric in the universe: If you’re one of the rare weirdos who actually has more than $250,000 in your savings account, then you clearly have too much money in your savings account. The Federal Deposit Insurance Corporation (FDIC) doesn’t insure individual deposits above this amount , so if your bank fails, your money won’t be refunded and you’ll be left holding the bag. If you (for some strange reason) have that much money sitting in your savings account, moving it is not difficult at all.
Know your needs
For most people, determining when you have too much money in your savings account starts with knowing how much money you need in that emergency fund. The six-month rule is a good place to start: calculate your monthly expenses, multiply them by six, and make sure you have at least that much. But emergency funds are personal items, so you may need more—like a year’s worth of expenses or a higher amount—to prepare for upcoming expenses.
Then add any monthly savings goals, such as saving for a down payment or paying off debt. Add it all up and this is your ideal savings account balance. For example, if your monthly expenses are around $4,000 and you’re also saving for a $5,000 vacation, you’ll need about $30,000 in your savings account—anything more is best used for higher-yielding investments.
Besides the total amount of money in your account, the next factor is time. Unless you plan to take a vacation for a few years, leaving that $5,000 in savings doesn’t make sense—put it somewhere where it will earn you real interest in the meantime. In other words, anything you’re saving for the future (like retirement) shouldn’t be kept in a savings account. A good rule of thumb is to look ahead about a year. If you don’t need the money within a year, anything over your emergency fund goals should be put elsewhere.
Of course, your individual needs will take precedence here, but always keep in mind that every dollar you save generates less return than almost literally anywhere else.