As the economic crisis continues to ripple throughout the nation, more and more Americans are taking the time to learn how to best manage their finances.
High on that list is building an emergency fund. In fact, a recent MassMutual survey found that more than 1 in 5 Americans (22%) saved at least $1,000 during the pandemic this summer.
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.
Why you shouldn't keep piling cash into your savings
Hoarding your cash and letting your savings balance get too high can actually cause you to lose out on money.
When you keep your cash in a savings account— even a high-yieldaccount like the Ally Online Savings Account or Marcus by Goldman Sachs High Yield Online Savings — over time you'll miss out on earning a better return on your money and really growing it like you would if you invested.
If a high-yield savings accountnets a 1% return and inflation averages close to 3%, you're not keeping up with the cost of living. In the long run, your cash loses its value and purchasing power.
Another red flag that you have too much cash in your savings account is if you exceed the $250,000 limit set by the Federal Deposit Insurance Corporation (FDIC) — obviously not a concern for the average saver.Most savings accounts will insure your money up to $250,000 per an account holder for every account, but anything beyond that amount is not guaranteed to be reimbursed in the event something happened, like the bank collapsed.
How much is too much?
The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.) saved up for emergencies, such as unexpected medical bills or immediate home or car repairs.
The guidelines fluctuate depending on each individual's circ*mstance. Given the current economic uncertainty, you may want to save up to a year of your basic living expenses (not including any discretionary spending) if you're worried your job is less stable. The idea is that you have enough cash accessible that you can tap into whenever you need it without having to rely on credit cards or a personal loan.
A savings account is also helpful for covering any immediate financial goals you want to achieve over the next two years. You can access your money whenever you want, and in the meantime it sits in a stable FDIC-insured account.
After you have enough saved up for an emergency fund, you can shift your focus and put your extra cash somewhere else, whether that's working toward hitting a short-term goal or investing your extra cash in the stock market.
Where to put that cash instead
Once you have the safety net of savings in place, you should take the time to really think about your bigger goals and how you can use money to achieve them.
Investing your money in the market can help you reach your longer-term goals more quickly. Though it carries more risk than keeping cash in a high-yield savings account, investing has the potential to offer much greater reward.
You can start by setting up a brokerage account through firms like E*TRADE, Fidelity, Charles Schwab or Vanguard. If you want to have less of a hand in managing your investment accounts, let a robo-advisor, like Betterment,Wealthfront and Ellevest, do the investing work for you.
Wherever you are on your financial journey, remember that the process takes time. Making a plan is the first step, and it's important to give yourself credit for even the small wins.
Goldman Sachs Bank USA is a Member FDIC.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Saving too much money can cause your younger self to make sacrifices that your future self doesn't need and didn't ask for. Instead of extreme frugality and early retirement, most people might be happier just doing work they enjoy.
Why shouldn't you hold all of your savings in cash? ›
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.
Should you keep your money in a savings account? ›
The takeaway
Though the amount you want to save may vary based on your living expenses, the number of dependents you have, and risk tolerance, aim to put away one to two months' worth of living expenses in a checking account and an additional two to four months in a savings account.
Can you have too much money in a savings account? ›
FDIC and NCUA insurance limits
This insurance protects your money if the financial institution you bank with goes out of business or otherwise can't afford to let you withdraw your money. So, regardless of any other factors, you generally shouldn't keep more than $250,000 in any insured deposit account.
Why shouldn't you have a savings account? ›
So if you keep your retirement nest egg in a savings account, you might lose out on the higher returns you need to outpace inflation over time. Also, a savings account won't give you any sort of tax break on your money.
How much cash can you keep at home legally in the US? ›
While it is legal to keep as much as money as you want at home, the standard limit for cash that is covered under a standard home insurance policy is $200, according to the American Property Casualty Insurance Association.
Where do millionaires keep their money? ›
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
How much does the average American have in savings? ›
The answer depends almost entirely on you, your habits now and your plans for later,” the financial services firm noted on its website. Data from the Federal Reserve's most recent Survey of Consumer Finances (2022) indicates the median retirement savings account balance for all U.S. families stands at $87,000.
How much cash is too much in savings? ›
How much is too much? The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.)
How much does the average person have in savings? ›
The average American has $65,100 in savings — excluding retirement assets — according to Northwestern Mutual's 2023 Planning & Progress Study. That's a 5% increase over the $62,000 reported in 2022.
In short, if you have less than $250,000 in your account at an FDIC-insured US bank, then you almost certainly have nothing to worry about. Each deposit account owner will be insured up to $250,000 — so, for example, if you have a joint account with your spouse, your money will be insured up to $500,000.
How much money is too much in a bank account? ›
savings account
How much is too much cash in savings? An amount exceeding $250,000 could be considered too much cash to have in a savings account. That's because $250,000 is the limit for standard deposit insurance coverage per depositor, per FDIC-insured bank, per ownership category.
Can I deposit $50,000 cash in a bank? ›
You can generally deposit as much as you want at a bank or other financial institution, but some banks may have extra rules and restrictions due to federal law and bank policy. For example, ATMs can limit the amount of bills you can deposit.
Why shouldn't you tell your bank how much you make? ›
No matter how you answer, there could be an impact on your credit limit, Howard said. Lenders can cut your credit line at any time whether or not you respond to update requests.
What is the biggest disadvantage to savings accounts? ›
CONS:
- Low return – although consumers can earn interest, they offer relatively lower rates.
- Taxes – there are no tax benefits for putting money into a savings account. ...
- Minimum balance – most accounts have a minimum balance which, if the account falls below, causes the account holder to incur charges.
Here are some low-risk options.
- Checking accounts. If you put your savings in a checking account, you'll be able to get to it easily. ...
- Savings accounts. ...
- Money market accounts. ...
- Certificates of deposit. ...
- Fixed rate annuities. ...
- Series I and EE savings bonds. ...
- Treasury securities. ...
- Municipal bonds.
Having large amounts of cash is not illegal, but it can easily lead to trouble. Law enforcement officers can seize the cash and try to keep it by filing a forfeiture action, claiming that the cash is proceeds of illegal activity. And criminal charges for the federal crime of “structuring” are becoming more common.
Is saving money in cash a bad idea? ›
As for your long-term money, you're likely better off in assets, such as stocks, that fluctuate more than cash, but that tend to deliver higher returns over time. That's because even though cash looks attractive now, it's historically done a lousy job keeping up with inflation.
Is it bad to hold too much cash? ›
We believe everyone should maintain a thoughtful emergency fund. However, holding too much cash beyond emergency funds or short-term needs may be dangerous. At the highest level, it could lead to significantly less wealth over time. Since 1928, U.S. Stocks have outperformed cash in 68% of the calendar years.
