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
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.
Why is it bad to save too much money? ›
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 keep all your money in 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.
Why is saving cash not a good idea? ›
Inflation decreases the value of any money you hold in cash.
Inflation, aka rising prices over time, reduces your purchasing power. That $10 bill could have bought you a whole sandwich a few years back. Today, the sandwich costs $12.50 (if you're lucky), so the same $10 bill only buys you 80% of the sandwich.
Should I keep all my money in one bank? ›
Keeping all of your money in one bank can be convenient. But it's important to consider whether you're getting the best rates on savings and paying the lowest fees for checking accounts. It's possible that you could get a better deal by keeping some of your money at a different bank.
How much cash is too much in savings? ›
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.
What's the most money you should keep in a savings account? ›
For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.
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.
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.
Why shouldn't you keep cash in the bank? ›
You don't want to keep your money at the bank because: It just degrades in value due to inflation. Your money isn't “working” for you. You can invest your money into growth assets rather then it sitting there.
The government has no regulations on the amount of money you can legally keep in your house or even the amount of money you can legally own overall. Just, the problem with keeping so much money in one place (likely in the form of cash) — it's very vulnerable to being lost.
What are 3 disadvantages of saving? ›
The disadvantages of using personal savings:
- You're limited to what you can afford: your savings may only get you so far.
- It's risky to spend all your savings: you might need your savings for a personal emergency.
- Your responsibility for success: having more people behind your business could lead to more success.
While it's perfectly OK to keep some cash at home, storing a large amount of funds in your house has two significant disadvantages: The money can be lost or stolen. Hiding cash under the mattress, behind a picture frame or anywhere in your house always carries the risk of it being misplaced, damaged or stolen.
How much is too much in one bank? ›
The current FDIC coverage limit is $250,000 per depositor, per ownership category, per financial institution. So if you have checking and savings accounts at multiple banks, each one is FDIC-insured up to that limit. That's a good thing if you tend to maintain higher balances in checking or savings.
Can I deposit $50,000 cash in a bank? ›
Depositing a big amount of cash that is $10,000 or more means your bank or credit union will report it to the federal government. The $10,000 threshold was created as part of the Bank Secrecy Act, passed by Congress in 1970, and adjusted with the Patriot Act in 2002.
Can a bank take your money from another bank? ›
The short answer is no, not directly. A bank can only directly access funds from an account you hold at a different financial institution to settle debts if they follow the legal process of obtaining a judgment and garnishment order.
How does saving too much money negatively affect the economy? ›
This paradox can be explained by analyzing the place, and impact, of increased savings in an economy. If a population decides to save more money at all income levels, then total revenues for companies will decline. This decreased demand causes a contraction of output, giving employers and employees lower income.
What are the disadvantages of having too much money? ›
It can cause you to make bad decisions: Having a lot of money can also cause you to make bad decisions. For example, if you're desperate for cash, you might take on a job that's unethical or immoral—even if it pays well.
Why having too much money is a bad thing? ›
Gamble agreed, arguing that having “too much money” can lead to acting more selfishly or recklessly. “For example, being richer and more powerful can give someone a sense of entitlement and enough ego that they would be unfaithful to their spouse,” he said.
Why is it good not to save money? ›
Saving money is like stagnant water, it's not going to take you forward. This is because if you stash every dollar you earned into a piggy bank or bury it in the garden, you still will only have the sum you hid away – no more. And over time its purchasing power gets smaller. The bank isn't much better.
