Having money in a savings account is important. You'll want to keep some emergency money in a high-yield savings account so it's accessible in case an unexpected expense pops up. And you may also need money saved for other things, such as when you're making a big purchase you don't want to put on a credit card.
But while you do want to have a healthy savings account balance, you don't want too much cash in this account because the potential ROI (return on investment) it can provide is much lower than you could get if you invested the money elsewhere. In fact, the average savings account interest rate is consistently less than 0.50%, which is well below the typical rate of inflation. It's also much less than the 10% average annual returns you could expect if you invested in the S&P 500.
The big question, though, is how do you know if you have too much in savings? While this can be tricky to answer, you should watch out for these three signs that your savings account balance may be too big.
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1. You haven't calculated your savings needs
You should have money in savings if you need it for specific things, such as:
- You are going to use it for a big purchase you can't afford right away but plan to make in the next few years (such as a home down payment).
- You are saving the money for emergencies, so you need to be able to access it at any time.
You should calculate exactly how much to put into savings accounts for each of these purposes in order to avoid ending up with an account balance that is larger than you need it to be.
So, for example, if you want to buy a $350,000 home with a 20% down payment, you would calculate that you need a balance of $70,000. If you want to take a $5,000 vacation, then you'd need to add that to your desired savings balance. And if you spend $4,500 a month and want an emergency fund with six months of living expenses, you would need an additional $27,000. If your savings account balance exceeded $102,000, you would have too much.
If you haven't actually gone through the process of identifying a purpose for your saved funds, then you may end up with more than you need sitting in this account slowly losing value. In fact, it might be a better idea to set up different savings accounts for each goal and establish a desired balance for each account. That way, you can monitor how you're doing on hitting that target and avoid having too much or too little in savings.
2. You have money in savings you aren't planning to need soon
If you have money in savings that you do not plan to use for five or more years (say, retirement savings), you have too much money in savings. Those funds should move into an investment account where you can earn reasonable returns on them, so you don't lose buying power by having your money just sitting there.
If you have an extra $5,000 in savings, even if you have it in a high-yield savings account, at best you'd probably earn around 4.00% per year, or $200, in interest. You'd lose out on $300 in interest compared with what you could earn if you earned a 10% return in an S&P fund. And the more extra money you have in savings and the longer it sits there, the more you lose out.
Take a look at your account balances and see how much is in savings and why. If you have money in savings you're planning on using for a long-term goal, move it into a brokerage account.
3. You're afraid to open an investment account
Finally, the last red flag suggesting you have too much in savings is if you are afraid to open a brokerage account at all. After all, for most people, their spare cash will either go into savings or be invested -- and you need a brokerage account to invest.
The good news is, getting started with investing doesn't have to be frightening. There are many great brokerage firms that have no minimum deposit requirements and that charge no commission fees.
Many of these firms also make it very simple to buy shares in an exchange-traded fund (ETF) that tracks the performance of the S&P 500, like the SPDR S&P 500 ETF, the Vanguard S&P 500 ETF, or the iShares Core S&P 500 ETF.
These funds track the performance of a financial index made up of around 500 large U.S. companies, so you get instant diversification and very limited risk of loss. You don't need any specialized knowledge to make this investment, you can expect pretty consistent returns if you invest for a long time, and S&P 500 ETFs have very low fees.
Do not be afraid to get your money into the market where it can work for you. Put the amount you need in savings based on goals you have calculated, and then invest the rest. You'll end up a lot better off in the end.
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FAQs
While having a stable savings to fall back on is crucial for a healthy financial future, dedicated savers should be aware that there is such a thing as having too much money saved.
Can you have too much money in savings? ›
While having a stable savings to fall back on is crucial for a healthy financial future, dedicated savers should be aware that there is such a thing as having too much money saved.
What happens when you have too much money? ›
Holding too much cash over the long term can be very detrimental. Because it's universally true that inflation erodes the true value of cash over time. It eats away at your purchasing power.
How do I know if I have enough savings? ›
If you can barely pay your bills each month, aren't saving any money in a retirement plan, or are spending more than 30% of your income on housing, you're probably not saving enough money.
Do I have enough in my savings? ›
Your savings account should have enough to keep you afloat in a financial emergency. Generally, having at least three to six months of living expenses can offer a safety net if you experience job loss or a medical emergency.
What is considered rich in savings? ›
To feel wealthy, Americans say you need a net worth of at least $2.2 million on average, according to financial services company Charles Schwab's annual Modern Wealth Survey. But even if you have that much in the bank, it might not be enough to be considered rich in certain places, the survey found.
How much cash is too much in savings account? ›
How much is too much savings? Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind. Anything over $250,000 in savings may not be protected in the rare event that your bank fails.
How much money should you keep in a regular savings account? ›
Most financial experts suggest you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job.
What is the money syndrome? ›
Dr. Overton: Money disorders are persistent patterns of self-destructive financial behavior. They develop out of distorted beliefs about money, or as a result of psychological issues like anxiety, depression or trauma. They're often caused by painful or distressing life events that are related to money.
How much money should you keep in savings? ›
Generally, you'll want to aim to have at least two to four months' worth of expenses in your savings account. “Your emergency fund is where you should be keeping the bulk of your cash,” says Ginty.
Fidelity's guideline: Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. Factors that will impact your personal savings goal include the age you plan to retire and the lifestyle you hope to have in retirement.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
What is the 7 rule for savings? ›
The seven percent savings rule provides a simple yet powerful guideline—save seven percent of your gross income before any taxes or other deductions come out of your paycheck. Saving at this level can help you make continuous progress towards your financial goals through the inevitable ups and downs of life.
Should you keep cash at home? ›
Key takeaways. Reasons people keep cash at home include emergency preparedness, financial privacy concerns and mistrust of banks. It's a good idea to keep enough cash at home to cover two months' worth of basic necessities, some experts recommend.
How much should you save a month? ›
How much should you save each month? For many people, the 50/30/20 rule is a great way to split up monthly income. This budgeting rule states that you should allocate 50 percent of your monthly income for essentials (such as housing, groceries and gas), 30 percent for wants and 20 percent for savings.
Which is not a key to saving money? ›
To have a negative savings rate means spending more money than you make and acquiring debt. The key to saving money is to: focus, make saving a habit and a priority, and discipline. Your income is not a key to saving money.
Is 20K too much in savings? ›
Is $20,000 a Good Amount of Savings? Having $20,000 in a savings account is a good starting point if you want to create a sizable emergency fund. When the occasional rainy day comes along, you'll be financially prepared for it. Of course, $20,000 may only go so far if you find yourself in an extreme situation.
Is 100k in savings too much? ›
While reaching the $100,000 mark is an admirable achievement, it shouldn't be seen as an end game. Even a six-figure bank account likely won't go far enough in retirement, which could last as long as 30 years.
Is 20K in savings bad? ›
The recommended amount to save varies from person to person, as everyone's financial situation differs. But for many people, $20,000 is a sizable emergency fund goal that will go far. If you have a large chunk of savings set aside, make sure you keep it in a bank account that earns interest.
Is 10k in savings too much? ›
There's nothing wrong with keeping $10,000 in a savings account. But it might not earn you the highest yields. CDs and brokerage accounts could be better homes for your cash in some situations.
