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simonkr/Getty Images July 11, 2022 TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from to . Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Saving money and having an can help you handle unplanned expenses and provide peace of mind — especially in uncertain times. But stashing away too much cash might not be the best personal finance strategy, either. It’s possible to have too much money sitting in a savings account that earns little or no interest. The danger of too much in savings
A liquid is a safe place to keep some money that’s easily accessible. Insurance from the Federal Deposit Insurance Corp. (FDIC), which covers up to $250,000 per person, per account type at an FDIC-insured bank, means that your if your bank fails. The big danger of having too much money sitting in a savings account, assuming you don’t pass the $250,000 threshold, is largely one of opportunity cost. Keeping too much of your spare cash in an account that generates little interest means you’re missing out on the opportunity to grow your money. According to Bankrate data, the paid just 0.1 percent interest as of June 29, 2022. However, you don’t have to settle for such a small yield. Right now, the pay 1 percent or higher, but that rate is still relatively low for money that you won’t need regular access to. Other deposit products carry similarly low risk, yet may pay a higher yield than savings accounts. You can find that pay an annual percentage yield (APY) of 2 percent, for instance, as well as that pay up to 3 percent. CDs aren’t the best place for money you might need access to before the term expires, however, since you’d likely be charged an early withdrawal penalty. currently pay yields of up to 1.3 percent. Unlike , these liquid accounts allow you to withdraw your funds at any time without penalty. Instead of keeping extra money in a savings account, you could direct it with greater growth and income potential, such as mutual funds, , stocks, and exchange traded funds, or ETFs. These investments are riskier than a savings account, but may offer higher rewards. Calculate the right savings threshold
Once you’ve decided how much money to set aside for emergencies, make sure your savings account balance reaches that threshold before you devote additional money to investments such as a taxable brokerage account or . If you don’t have an yet, it can help to start with small savings goals, such as $500 or $1,000, and work your way up from there. “Your emergency fund should be at minimum three months of living expenses,” says financial educator Angel Radcliffe. “I would recommend six.” That means someone with monthly bills totaling $3,000 should have between $9,000 and $18,000 in savings before he starts investing his extra cash in higher-yielding investments. Maintaining this savings cushion will enable you to cover unexpected expenses, such as a car repair or a medical bill. It also gives you a cash cushion to deal with a loss of income due to a job loss. Financial coach and writer Katie Oelker says the amount you want to sock away in your emergency fund depends on your risk tolerance and personal situation. “Once you have three months of expenses built up, ask yourself how much more you’d feel comfortable with,” Oelker says. “Is it six months? Nine months? Twelve months? A lot of this answer has to do with how comfortable you are with the risk of losing income, as well as how long you think you would need to stretch your [emergency] fund if needed.” For example, if you’re part of a dual-income household, you might be able to get away with a smaller emergency fund if you can rely on your partner’s income if you lose your job. But if you’re the sole breadwinner for your household, you might want to have a larger emergency fund. Maximize your emergency fund
Once you’ve built your emergency fund, try to earn a safe, but high rate of return on that money. “While many save in a personal savings account for easy access for emergencies, there are other options to make the best of your savings for easy access to funds,” financial educator Radcliffe says. “Moving your savings to a will help increase your yield.” One of the first places to look for higher-yielding accounts should be online banks. They tend to offer some of the most competitive rates on savings accounts and might not have minimum balances or charge monthly fees. Determine your financial goals
Your financial goals can have a major impact on how much money you want to set aside in lower-yielding deposit accounts versus investments with greater growth potential like stocks. For example, if you want to make a significant purchase — such as buying a home or a car — in the very near future, it makes sense to have a large amount of money in a savings account. The last thing that you want is to by investing your money in the stock market, only to have your investments plummet in value as you start house hunting. For longer-term goals, such as a retirement that’s decades away, investing can be the way to go. Financial coach Oelker recommends using to invest once you’ve built your emergency fund. “Once you’ve reached your goal, consider investing extra savings either by contributing more through an employer-sponsored plan, such as a 401k or 403b, or funding a Roth or traditional IRA,” Oelker says. “Every dollar you invest will compound. And the sooner you start padding your investment accounts, the harder your money will work for you.” Bottom line
Having significantly more money in a savings account than you would need for emergencies can mean you’re losing out on higher potential returns elsewhere. Once you’ve built up savings for emergencies and short-term goals, additional funds could be earning better interest in CDs or money market accounts, as well as stocks, bonds or mutual funds. — Bankrate’s contributed to an update of this article. SHARE: TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from to . Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles