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.
Is it bad to have a lot of money in savings account? ›
“Individuals should limit the amount of money in savings accounts to the amount they need to live for two months as long as they can easily access their funds in a safe money market account that pays much higher interest,” said accredited financial counselor Camille Gaines, founder of Retire Certain.
How much money is too much to have 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.
Is there such a thing as saving too much? ›
Saving to prepare for emergencies, retirement or financial goals like buying a house is smart, to be sure. But if you're saving far more than necessary, you could be sacrificing other important aspects of your financial health, and that extra money could be put to better use elsewhere.
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.
Where do billionaires keep their money? ›
Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.
What bank do most millionaires use? ›
The Most Popular Banks for Millionaires
- JP Morgan Private Bank. “J.P. Morgan Private Bank is known for its investment services, which makes them a great option for those with millionaire status,” Kullberg said. ...
- Bank of America Private Bank. ...
- Citi Private Bank. ...
- Chase Private Client.
Bottom Line. Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
How much money does the average person keep in their savings account? ›
The median savings account balance for all families in the U.S. was $8,000 in 2022. Generally, higher-income earners and older individuals save more than younger ones. Some experts suggest three to six months' living expenses as a goal.
How much money do I need to invest to make $1000 a month? ›
Calculate the Investment Needed: To earn $1,000 per month, or $12,000 per year, at a 3% yield, you'd need to invest a total of about $400,000.
It's perfectly legal to do so, but know that cash deposits over $10,000 will be reported to the federal authorities. That's not a problem as long as you can document a legal business that produced that cash.
Should you keep cash at home? ›
It's a good idea to keep enough cash at home to cover two months' worth of basic necessities, some experts recommend. A locked, waterproof and fireproof safe can help protect your cash and other valuables from fire, flood or theft.
How many people don t have $1,000 in savings? ›
Bankrate's latest survey results found 56% of U.S. adults lack the emergency funds to handle a $1,000 unexpected expense and one-third (35%) said they would have to borrow the money somehow to pay for it.
Is $5000 a lot in savings? ›
Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation. Consider these rules of thumb and other factors to calculate your ideal emergency fund amount.
Should I keep $10,000 in savings? ›
First things first: There's nothing wrong with keeping $10,000 in a savings account. If you're working with a reputable bank, your money will have Federal Deposit Insurance Corporation (FDIC) insurance up to $250,000 per person per account ($500,000 for joint accounts). This protects your money even if the bank fails.
How does saving too much money negatively affect the economy? ›
From an economic standpoint, it's actually possible to save too much money. Saving more money results in consumers spending less, which is bad for the economy. A decrease in demand can lead to deflation, which is when prices drop. Falling prices may seem great, but it has a significant negative impact on the economy.
What are the disadvantages of having too much money? ›
Let's see the sentiments from how “having too much money” plays out from other individuals who underestimated your luck and potential (or rich uncle).
- Jealousy bug. ...
- People don't think you deserve it. ...
- People think you're greedy. ...
- People start pitching. ...
- People expect handouts. ...
- People think you're cheap.
Spending too much money unnecessarily is never good. It will create a dent in your finances and will not let you reach your financial goals. The first step to overcoming overspending is to understand where you are overspending. You may never realize it, but you might be overspending a lot more than you think.
