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 hold all of your savings in cash? ›
If you're saving that cash for a long-term goal like your retirement, keeping it as cash instead of investing it in the stock market, for example, might cost you as much as 10% annually on average. Over the course of 30 years, that could really add up.
Should you be stashing your savings in cash? ›
With an emergency fund, you'll want to be able to access your cash in a pinch and protect your principal. However, if you're saving for retirement, you probably won't tap that cash for years or even decades and, therefore, can take on more risk.
Is it bad to have a lot of money in a savings account? ›
Just remember that while it's great to watch your savings grow, you can have too much of a good thing. “There is an opportunity cost to holding onto too much cash,” Stroup said. “Each year those dollars lose purchasing power as a result of inflation.
How much cash is too much to have in savings? ›
You should keep enough money in checking to cover your monthly bills with some wiggle room – about a month of expenses. That's much lower than the three to six months' worth of expenses you should keep in your savings account for emergencies.
How much money should you keep in a regular savings account? ›
The standard recommendation is to have enough to cover three to six months' worth of basic expenses. As a goal, that number can be steep. In reality, you can benefit from saving any amount.
How much cash can you keep at home legally in the US? ›
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.
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.
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? ›
Though the term is meant to be humorous, there seems to be truth to it. Studies have actually found that wealth may be at odds with empathy and compassion. Gamble agreed, arguing that having “too much money” can lead to acting more selfishly or recklessly.
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.
