There is never “too much” when it comes to money — except perhaps when it comes to how much is in your savings accounts. Experts argue that there are actual drawbacks to putting too much cash in these accounts for several reasons.
First, there’s the fact that the Federal Deposit Insurance Corporation (FDIC) only insures up to $250,000 in deposits. As was recently witnessed with the failures of three banks and the ensuing banking turmoil, this has made some depositors very jittery.
According to Tatiana Tsoir, CPA, business expert and founder of The Bold Blog, $225,000 is a reasonable amount “to leave room for growth and income that your savings may be generating.” She said, “If you know the interest rate, you can calculate to ensure that you don’t cross that limit. I definitely advise going for the max that will get you close to $250,000 but not over it. And use several banks to get you protected.”
Another factor to keep in mind is what the best use of your money is — and whether this is it.
“I recommend keeping a 3-6-month emergency fund in your savings account plus any money that you have a stated goal or purpose for in the next three years,” said Kendall Meade, CFP at SoFi. “This money should be kept safe and accessible. Money outside of this amount or being saved for longer term goals can be invested where over the long term it may be able to earn more for you.”
The sentiment was echoed by several experts who remind consumers that when money is stagnant, it loses value.
“Savings should be invested in income-producing assets like real estate and other businesses. Your money must be helping and serving people if it is to grow. Sitting in the bank is not serving anyone including yourself,” said Steve Davis, CEO of Total Wealth Academy.
Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth, added thathaving 12 months of expenses in an emergency savings account does not make you more secure than 6 months.
“The additional 6 months of savings should be put to work and invested,” said Zigmont. “Keep in mind that if you have credit card debt, you will likely do better paying that off than keeping money in savings. Even the best HYSA won’t beat the 20%+ interest of a credit card.”
Once you have determined what works for you, the next step is to avoid “bad” ways to use these savings accounts. Here are five examples.
Using Savings as a Checking Account
Savings accounts are designed to be a place to save money, not to make frequent transactions, said Lucas Noble, CFP at Noble Financial Group.
“Some people make the mistake of using their savings account as a checking account, making frequent withdrawals that can deplete their savings over time,” he said, adding that not reassessing your savings goals is also a mistake.
“As your financial situation changes, it’s important to reassess your savings goals. Many people make the mistake of not adjusting their savings strategy as their financial needs change, leading to missed opportunities for growth and increased risk,” he said.
Impulse Purchases
To avoid this, Meade recommends implementing a waiting period.
“This can be 24 hours for smaller purchases or up to a month for larger purchases. This allows you to think over the purchase and make sure you really want/need it. In the meantime, you can see if there is a better deal out there too,” she added.
Expensive Vacations
While it’s essential to enjoy life, prioritize experiences that are memorable and affordable without jeopardizing your financial stability, said Colt Agar, marketing researcher of Bizpedia.
Gambling in the Stock Market
Tsoir explained that on average, people who “DIY their investing strategy, even if they day trade” lose about 2.56% of the standard 9-10% rate of return — so a quarter roughly — “because as humans we don’t have enough discipline and do panic.” She added, “So when the market is trending down we usually jump right in and miss out on the best 10 days a year in the stock market. And to me trying to beat professional investors skills is akin to gambling!”
Luxury Purchases
This could also end up being a costly mistake when you don’t have 12-24 months of expenses set aside.
“I’d rather personally invest in myself — a course, a coaching program — than get some luxury and get that temporary dopamine boost that’s going to wear off fast,” Tsoir said.
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