Super savers: How much is too much to put in a savings account?

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Saving money and having an emergency fund is important, especially in uncertain times, such as a pandemic. But stashing away too much cash might not be the best personal finance strategy, either.

Americans constantly hear about how they don’t have enough money in savings. Or how a large portion of the population would need to borrow money to cover an unexpected expense.

For some Americans, though, the coronavirus pandemic has turned the typical savings shortfall on its head, as spending drops and the national saving rate spikes. The personal savings rate rose to a record 33 percent in April. With some people saving more than ever before, it’s worth considering whether it’s possible to have too much money sitting in a savings account that earns little or no interest.

Many people, unfortunately, aren’t flush with cash, but for those who already have sizable emergency funds, there are other things you could do with your extra cash.

The danger of too much in savings

Keeping money in a savings account is typically a good thing to do. Savings accounts are a safe place to store your extra money, and provide an easy way to make withdrawals. Insurance from the Federal Deposit Insurance Corp., which covers up to $250,000 per person, per account type at an FDIC-insured bank, means that your savings are protected by the federal government if your bank fails.

The big danger of having too much money sitting in a savings account, assuming you don’t pass the $250,000 threshold, is largely one of opportunity cost. By keeping too much of your spare cash in an account that generates little interest, you miss out on the opportunity to grow your money.

According to Bankrate data, the average savings account paid just 0.09 percent interest as of September. However, you don’t have to settle for such a puny yield. There are high-yield accounts that pay more. Right now, the best ones pay around 0.9 percent, but that rate is still relatively low for money that you won’t need for a number of years.

Instead of keeping that money in a savings account, you could direct it into investments with greater growth and income potential, such as mutual funds, bonds, stocks, and exchange traded funds, or ETFs. These investments are riskier than a savings account, but offer higher potential rewards.

Maintaining a solid balance in your savings account to help you weather a financial storm is important, but you don’t want to keep too much of your money in the account, and risk missing out on the opportunity to make more money by investing.

Calculate the right savings threshold

It’s important to consider how much money you want to have set aside for an emergency. Make sure your savings account balance reaches that threshold before you start investing extra money in, say, a taxable brokerage account or an IRA. But you also want to make sure that your savings balance doesn’t go too far past that threshold.

If you don’t have an emergency fund yet, starting small is a good move. Create small goals, like saving $500 or $1,000, and work your way up from there.

Financial educator Angel Radcliffe suggests that “your emergency fund should be at minimum three months of living expenses. I would recommend six.” That means someone with monthly bills totaling $3,000 should have between $9,000 and $18,000 in savings before they start investing their extra cash in higher-yielding investments.

Maintaining this savings cushion will enable you to cover unexpected expenses, like a car repair or a medical bill. It also gives you a cash cushion to deal with a loss of income due to a job loss.

Financial coach and writer Katie Oelker says the amount you want to sock away in your emergency fund depends on your risk tolerance and personal situation.

“Once you have three months of expenses built up, ask yourself how much more you’d feel comfortable with,” Oelker says. “Is it  six months? Nine months? Twelve months? A lot of this answer has to do with how comfortable you are with the risk of losing income, as well as how long you think you would need to stretch your (emergency) fund if needed.”

For example, if you’re part of a dual-income, you might be able to get away with a smaller emergency fund if you can rely on your partner’s income if you lose your job. But if you’re the sole breadwinner for your household, you might want to have a larger emergency fund.

Maximize your extra cash

Once you’ve built your emergency fund, try to get the most value out of that money. “While many save in a personal savings account for easy access for emergencies, there are other options to make the best of your savings for easy access to funds,” Radcliffe says. “Moving your savings to a high-interest savings account will help increase your yield.”

One of the first places to look for higher-yielding accounts should be online banks. They tend to offer some of the highest interest rates on savings accounts and rarely have minimum balances or charge monthly fees.

If you want to try to get even more interest from your emergency fund, you could consider setting up a CD ladder. You’ll lose some flexibility but may be able to boost your interest rate somewhat.

For those who have a lot of spare cash and a long time before they will need to access their cash, investing in stocks, which historically have generated much better returns than bonds or cash, is a strategy to consider.

Determine your financial goals

Your financial goals can have a major impact on how much money you want to set aside on lower-yielding cash or investments with greater growth potential like stocks.

For example, if you want to make a large purchase, such as buying a home or a car, in the very near future, it makes sense to have a large amount of money in a savings account. The last thing that you want is to save for a down payment by investing your money in the stock market, only to have your investments plummet in value as you start house hunting.

For other longer-term goals, like retirement decades away, investing is the way to go. Oelker recommends using tax-advantaged retirement accounts to invest once you’ve built your emergency fund.

“Once you’ve reached your goal, consider investing extra savings either by contributing more through an employer-sponsored plan (such as a 401k or 403b) or funding a Roth or traditional IRA,” Oelker says. “Every dollar you invest will compound. And the sooner you start padding your investment accounts, the harder your money will work for you.”

Bottom line

Having an emergency fund is important for everyone. It can help you handle unexpected expenses and deal with situations like losing your job. So, if you’re fortunate enough to be able to save a lot, it’s worth considering the opportunity cost of having too much money saved with your bank.

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