Having too much money in your savings account is a good problem to have — unfortunately, it’s not particularly common.
The last year gave savers an opportunity to cash in on the highest interest rates in decades. But a new GOBankingRates survey of more than 1,000 people found that many missed the chance to grow their emergency funds.
But on the other end of the spectrum are a minority of savers who squander different opportunities by hoarding too much cash in deposit accounts.
“Having excess cash beyond an emergency fund can mean missing out on potential returns from investing,” said Fluent in Finance founder Andrew Lokenauth, a 15-year Wall Street veteran who held leadership positions at JP Morgan, Goldman Sachs and Citi. “The opportunity cost of playing it too safe with savings can be substantial over decades.”
While the national average deposit yield is still a paltry 0.42%, the Federal Reserve’s war on inflation has resurrected truly high-yield savings accounts, with some offering APYs over 5%.
However, the survey shows that most people missed their chance to compound their cash with investment-grade returns.
One-third of the study’s respondents contributed exactly zero dollars to their savings accounts over the past year. Roughly another one-quarter contributed less than $1,000, with single-digit percentages accounting for every amount over that.
More than half of those who have money saved saw their balances decrease by up to half or more in the same period.
While the greatest share by far — about 45% — has either nothing saved or just a few hundred dollars, the study did have a silver lining. About 15% have five-figure savings of $10,000 or more. While they’re certainly in better shape than the majority, they might be getting in their own way by sitting on too much cash in savings.
When it comes to liquid cash in an FDIC-insured deposit account, too much is certainly better than not enough — but the best outcome is to hit the sweet spot in between.
“While having an emergency fund in savings is prudent, there are signs you may be keeping too much cash there versus investing it,” said Lokenauth, who laid out the following indications that you might be overdoing it:
- Your savings exceed your basic living expenses for six to 12 months.
- You consistently have money left over after maxing out your IRA and other tax-advantaged retirement accounts each year.
- You are losing purchasing power to inflation over time as your cash earns little interest.
- You have specific goals like buying a house or retirement that are many years away.
- You have a stable job and income, low debt and a high risk tolerance.
Lokenauth suggested saving enough for six to 12 months, the maximum that most financial experts recommend. Many think you’d be safe cutting both those amounts in half.
in Santa Monica, California.
But your household income situation will determine the amount that’s right for you.
“For couples where both partners are working, you can aim for the three-month figure unless having six months of cash on hand provides you more peace of mind. For those living on their own, aim for the six-month figure since a second income is absent to help float you financially in an emergency situation, such as a job loss.”
Money market accounts — not to be confused with money market funds — deliver yields that are typically higher than standard deposit accounts with some checking account features like bill pay and limited monthly check writing.
You might consider thinning out your emergency fund even further and stashing the rest in an MMA.
“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. “Safe money market accounts that do not fluctuate in value can be seen as a good alternative to keeping money in a savings account that pays little interest and has a negative real return after inflation.”
Gaines reiterates that even most high-yield savings accounts lose value to inflation over time.
“More than two months’ worth of living expenses in a savings account is too much given the ability to earn around 5% from easily accessible money market accounts that should not fluctuate in price.”
Invest In Debt Reduction, Then Invest for Wealth-Building
Whether your cash is in a high-yield savings account or an MMA, the yield it earns won’t come close to matching the rate your credit card issuer collects from your revolving balances — and that presents a job opportunity to any excess dollars in your emergency fund.
“With any extra funds, I’d first allocate that toward any debt,” said Bethany Hickey, a personal finance expert with Finder.com. “Then I’d consider some interest-only payments on my home loan, and then add any extra to another savings account if I’m preparing for a near-future large purchase. If none of those apply, look into investment options with higher returns than a traditional savings account, such as certificates of deposit or index funds.”
Lokenauth agrees but thinks you should aim higher than CDs if you spot any of the five excess-savings red flags he outlined.
“If you see these signs, consider shifting some savings into diversified investments like stocks, bonds and real estate to grow your money over time,” he said. “As your investment portfolio builds, you can reduce reliance on cash reserves alone.”
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. The only way to outpace inflation over your lifetime is to invest excess cash in a diverse mix of stocks, real estate and other assets that generate returns higher than inflation.”
Methdology: GOBankingRates surveyed 1,091 Americans aged 18 and older from across the country between August 14 and August 16, 2023, asking twenty different questions: (1) Have you had trouble paying your utility (gas, electric, heat, internet, etc.) bills in the last 6-12 months?; (2) Which of the following bills/expenses has been the hardest to keep up with over the past year?; (3) Have you bought a car/truck in the last 6-12 months?; (4) Have you ever been on food stamps?; (5) Have you or would you use artificial intelligence (AI) to earn a passive income?; (6) Where do you shop for the best deals on groceries?; (7) What is your current annual income?; (8) How much were you able to contribute to your savings this year?; (9) How much have your savings/investments decreased over the past year?; (10) Next year’s (2024) Social Security Cost of Living Adjustment (COLA) will be 3% instead of the 8.7% it saw in 2023. Will this affect you?; (11) What assets do you have in your retirement portfolio? (select all that apply); (12) How much money do you currently have saved for retirement?; (13) How much personal savings do you currently have?; (14) What’s the first step you would take if you were starting a small business?; (15) If given the choice between your current job and starting your own business, which would you choose?; (16) If you have any plans to start a small business, what is the timeline?; (17) How much do you currently spend on rent?; (18) How much do you currently pay monthly on your mortgage?; (19) How much has your housing (rent, mortgage, etc.) gone up over the past year?; and (20) How long do you believe it will take you to save, in order to buy a house?. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
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