Are You Keeping Too Much Money in Your Savings Account?

Your savings account is meant to be the place where you save your money. Whether you’re saving up for emergencies or for a goal like a home or future education, your savings account is where you place your money. But what many people don’t realize is that having a lot of money in your savings account can actually become a drawback.

A typical savings account doesn’t exactly do very much for your money. With average national savings account interest rates at only 0.06 percent, your savings aren’t growing while they’re stashed away. And that could mean your money would do better off in another place.

While saving money in your savings account is a great financial goal, it’s time to consider whether you’re putting too much money into that single account. Here’s what you need to know.

Keep Living Expenses in Both Your Checking and Savings Accounts

Your savings account is ideal for saving money – but it’s a good idea to set a clear purpose for why that money is in your savings account. And according to financial experts, it’s a good idea to keep your living expenses in your checking account and your emergency savings in your savings account.

As you save money, put away about three to six months of savings in your regular savings account. You can keep the money you’ll need to get by each month, or for three to five weeks, in your checking account for accessibility. Keeping a cushion of money in your savings account ensures you have money that you can withdraw, if needed, in a sudden emergency like unexpected car repairs, health issues, or unemployment.

But once you’ve racked up three to six months worth of savings in your basic savings account, it may not be a good idea to continue adding more to the stash. Any money put in your savings account will earn very little interest. And if you’re saving for a bigger financial goal, it could actually hinder your progress.

Consider What Goals You’re Saving For

Before you continue adding money to your savings account, it’s a good idea to consider what you’re actually saving money for. That’s because the “right” amount of money you should keep in your savings account depends on what you’re saving for.

For example, if you’re saving money to build up an emergency fund, your savings account is the best place to stash your money. You’ll be able to access that money in no time at all when you need it, and you don’t need to be too concerned about interest rates or the speed at which your money is growing. It just needs to be available in case an emergency happens.

However, if you’re saving for a different goal, putting your money into your savings account might not be a great idea. Savings accounts, while accessible, aren’t meant to be tapped into frequently. Most accounts even limit the number of withdrawals you can make. If you exceed that number, you can face penalties like high fees, have your account converted, or lose your account altogether. Additionally, most basic savings accounts don’t come with any perks. They may not even be very different from your checking account.

So, if you’re using your savings account to save for a family vacation, for a home remodel project, or another purpose that’ll require withdrawals or that could benefit from increased perks, you may want to move your money. 

An Excess of Savings Means Your Money Isn’t Reaching Its Full Potential

Instead of continually adding money to your savings account, you need to consider other options. You need to consider different accounts that can help you do more with your money.

According to financial experts, you should avoid saving too much money at a low interest rate – like today’s current savings account interest rates. Doing so can actually cause you to lose money over time due to inflation. It could also cause you to lose out on potential tax advantages, investment earnings, and a growing balance.

For example, choosing a regular savings account instead of a high-interest savings account or even a 401(k) or IRA is costly. At 0.06 percent interest, a $20,000 balance will earn just $12 in one year. That same $20,000 in an account with 2 percent interest will earn $400. 

You can also choose to put your extra savings where it’ll make a bigger impact on your financial future. For example, if you have debt, you can use your extra money to pay it down. Or, you could stash it away in your retirement account and increase your contributions. Investing is also an option, even if you invest conservatively.

The Right Money Moves Can Help You Save and Grow Your Money

Keeping a lot of money in your savings account might seem like a smart idea. After all, you’re saving money for the future. But having an excess beyond your emergency fund can be a bad idea. Over time, with inflation, you can lose earning power and weaken the value of the money you’ve saved. 

Instead, search for and consider different kinds of savings accounts and investment options. Is there a way you can invest and still save for your future? Can you help your money grow while it’s being saved for a rainy day? You might discover you can do a lot with a little extra savings.

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Heather Fishel

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