The COVID-19 pandemic, and ensuing economic uncertainty, taught many Americans the importance of having adequate savings. But is there such a thing as having too much in savings?
Yes, financial experts say.
“Your cash sits idle and loses value due to inflation,” says Lauren Anastasio, director of financial advice at financial technology company Stash. “That downside offsets the need for keeping the cash on hand for an emergency or loss of income.”
That doesn’t mean you should spend all your excess cash, however. Rather, you should invest it in the stock market so that your money can grow long-term. While how much you should keep in your savings account depends on your individual financial goals and situation, if you find yourself with more than a year’s worth of living expenses in savings, it may be a sign that you should move your money to an investment account where it can work harder for you.
How Much Can You Save in a Savings Account?
Banks and credit unions typically don’t have account maximums, nor are there any laws limiting how much you can keep in a bank account. So, you can deposit as much as you want into a savings account.
However, one thing you should be aware of is FDIC insurance limits. Established in 1933 in response to the many bank failures during the Great Depression, the Federal Deposit Insurance Corporation (FDIC) protects consumers’ bank deposits in the event of a bank failure.
FDIC deposit insurance applies to all deposit accounts at FDIC-insured banks; this includes checking accounts, savings accounts, money market accounts, and CDs. FDIC insurance will protect up to $250,000 in deposits per consumer per account.
Credit union accounts have deposit insurance, also up to $250,000 per account, through the National Credit Union Administration (NCUA).
“There are many ways to go above that,” says Ken Tumin, senior industry analyst with LendingTree and founder of DepositAccounts.com. “For example, a joint account with a spouse is covered up to $500,000.” Spreading your money across multiple savings accounts with different banks is another way to ensure all your money is insured.
What Is the Average Savings Account Interest Rate?
When you keep your money in a savings account, the bank will pay you interest on that balance. The annual percentage yield, or APY, determines the amount of interest you’ll earn. APYs can vary by bank and account type, with high-yield savings accounts typically offering higher APYs than standard savings accounts. However, savings account interest rates are relatively low across the board right now, due to the Federal Reserve slashing interest rates in 2020.
Certain banks may also offer elevated APYs on their savings accounts if you fulfill certain requirements — such as linking a checking account from the same bank and having a certain number of direct deposits every month.
“For brick and mortar banks, 0.06% is the average [APY],” says Tumin. “If you had $10,000 in savings, your return is just $6. Online banks almost always have higher rates. They have less overhead, and so can offer much higher rates than brick-and-mortar banks. The average savings rate for online banks is 0.5% — about eight times the brick and mortar rate.”
If you’re looking for a new savings account that offers a higher-than-average APY, check out NextAdvisor’s picks for the best savings account rates of 2023.
You may also want to consider other deposit accounts besides savings accounts. Money market accounts, or MMAs, can offer slightly higher APYs than savings accounts, but the difference may not be significant in this current rate environment. Money market accounts also offer debit cards and check-writing privileges, making them a good blend between a savings account and a checking account. However, they’re subject to the same 6 withdrawals per month limit as savings accounts and may have higher minimum balance requirements than savings accounts.
Certificates of deposits, or CDs, can offer higher rates than both MMAs and savings accounts. However, the tradeoff is that you must keep your money locked in that account for a certain amount of time. If you withdraw your money early, you may lose any interest you earn or pay a penalty. You can choose the duration of the CD when you open one — for example, one year, three years, or five years. CDs with longer maturity dates typically offer higher APYs.
How Much Should You Have in Savings?
When it comes to how much you should keep in savings, there isn’t one number that works for everyone. You should look at your individual financial situation — including your monthly income and cash flow, your monthly expenses, and any other financial obligations you have — to figure out how much cash you realistically need on hand.
“I firmly believe people should save three to six months of essential expenses,” says Anastasio. “That can be quite a wide range. Three months is appropriate for anyone with very highly marketable skills — in the event you lose a job, it wouldn’t take long to find another job— someone that is a renter, or dual-income households. In those cases, you can generally feel comfortable at the lower end of that range.”
By contrast, you may need more than that if there are more demands on your budget.
“Six months of expenses is more appropriate for homeowners — since they’re more likely to have major expenses or repairs — those with children, and single-earner households.” says Anastasio. “If you have anyone depending on you financially — like a business partner or aging parent — you likely need six months or even more.”
Besides being a safe place to store your emergency fund, savings accounts can also be useful tools to help you manage your short-term savings goals.
“If you expect to use that money in the next two or three years, keep it in savings,” Anastasio says. “If you’re getting married, buying a home, or starting a business, those are important life events that require a lot of capital. In a timeline that short, it makes sense to keep it as cash in a savings account.”
Why You Shouldn’t Keep Too Much Cash in Savings
In general, experts recommend keeping three to six months in the bank, though Anastasio says she understands that some people feel more comfortable with up to 12 months of expenses. However, once your account surpasses that level, the opportunity cost can be too high.
“I would be hard-pressed to find circumstances where the opportunity cost to keep that much cash [over 12 months of living expenses] on hand is worth it,” says Anastasio.
While keeping your money in a savings account will earn you a little bit of interest, interest rates on almost all savings accounts right now are too low to offer any meaningful earnings. Instead, you should make your money work harder for you by investing in long-term investments like stocks, index funds, or bonds. Particularly with longer-term goals, it makes more sense to invest than stash your money in savings so you can take advantage of compound interest and market growth.
“With long-term goals, such as retirement, it makes sense to be more aggressive and invest for the potential of higher returns,” says Tumin. With retirement savings especially, investing your money also lets you benefit from tax-advantaged investment accounts like IRAs and 401(k)s.
The typical high-yield savings account has an APY of around 0.50%. By contrast, the S&P 500 — one of the common metrics used to measure the total stock market — returned an average of 13.6% annually for the past 10 years, according to data from investment bank Goldman Sachs.
Here’s how much $10,000 would’ve grown in 10 years in a high-yield savings account at 0.5% APY, and invested in the stock market with a 13.6% annual return.
|Interest earned in a high-yield savings account (0.50% APY, compounded annually)||Investment gains from investing in the S&P 500 (13.6% growth, compounded annually)|
Keep in mind that unlike cash, investments are not 100% risk-free and could potentially lose their value. However, the stock market as a whole will generally see positive returns over the long term. That’s why, given a long enough time horizon and a diversified portfolio (such as one consisting of low-cost index funds), you can balance the risks of investing while reaping far greater returns than you could ever get from a savings account.
How to Grow Your Savings Account
While it’s generally a good idea to invest your extra cash once you have an adequate financial safety net, not everyone may be at that point yet. If your balance is below the recommended three to six months of living expenses guideline, you can build your savings by using these tips:
Trim Your Budget
The first step in increasing your savings is to create or review your budget. View your bank statements and credit card bills to find out how much you spend on your monthly expenses. Look for expenses that you can reduce or eliminate completely so you can put more money into savings.
One useful tool is Trim, an app that analyzes your spending and identifies opportunities to save money. It will even negotiate your cable, internet, and phone bills for you, and it takes 15% of your annual savings. According to the company, users save an average of $620.
Set Aside Windfalls
During the year, you may receive cash that you didn’t expect. Whether it’s a birthday gift or a tax refund, saving that extra money as soon as it arrives can help you build your savings over time.
For example, the average tax refund was $3,226 in 2022, according to the IRS. If you put the entire amount into your savings account, that could provide a substantial boost to your savings balance.
Save Your Spare Change
If you have trouble saving money, consider signing up for a spare change app like Digit, Qapital, or Chime. Spare change apps round your purchases up to the nearest full dollar and deposit the difference into your savings account, making it easy to build your savings balance without any work on your part.
Set Up Automatic Withdrawals
Managing money is often psychological; one way to save more is to trick yourself into not realizing you’re saving. By setting up automatic withdrawals from your checking account — for example, transferring $50 to your savings account every payday — you can save money before you can mentally spend it. You probably won’t even notice the withdrawals are happening, but those regular deposits can make a big difference.
You can use NextAdvisor’s savings calculator to see how much small changes can add up over time. For example, here’s how much you’d have if you saved $50, $100, or $250 every month.
|After 6 Months||After One Year||After Five Years|
|$50 Per Month||$301||$602||$3,038|
|$100 Per Month||$602||$1,204||$6,075|
|$250 Per Month||$1,503||$3,008||$15,186|