How Big of a Savings Account Balance Is Too Big?

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If you have an emergency fund that’s larger than it should be or you have money you won’t need in the short term, your account balance may be too big. 

Having money in savings can help you avoid a whole lot of financial trouble. If you have cash in a savings account, you can use that money when you must buy something you can’t afford to pay for out of a single paycheck. You can also avoid getting into credit card debt when surprise expenses happen since you’ll be able to tap into your savings account to pay the unexpected costs.

Having too much money in savings, though, can be a problem. The interest rate on the typical savings account is typically below 0.50%, which is lower than the Federal Reserve’s targeted 2% annual rate of inflation — so people who overinvest in a savings account will find themselves losing ground.

How much is too much, though? Your savings account balance is probably too big if either of the following things are true.

Your emergency fund exceeds a year’s worth of living expenses for no clear reason

It is extremely important that you have an emergency fund. Surprise expenses or an unexpected drop in income can happen to anyone. Without money saved for emergencies, this could lead to serious financial damage.

But you don’t want your emergency fund to be too big. In most cases, experts recommend that you have three to six months of living expenses set aside. If you really want to be prepared for big surprises or a long income loss — perhaps because you work in an industry where jobs are scarce, you have medical issues, or you’re the sole breadwinner for your family — then it may make sense to have enough in your emergency fund to cover a year’s worth of expenses.

But once you get beyond that, keeping extra money for emergencies usually doesn’t make a whole lot of sense. A year gives you a lot of time to make more permanent lifestyle changes if you’ve faced a really big emergency, or to get back on your feet career-wise.

READ MORE: Emergency Fund Calculator

So unless there’s a clear reason why you would need more than a year’s worth of expenses in an accessible savings account, you probably have too much in savings if your emergency fund exceeds this amount.

You have money you won’t need for years to come

Another big sign that your savings account balance is too big is if you’re saving money in the account when you won’t need those funds for more than three to five years.

See, if you have a long timeline before you’re going to need the money you’re setting aside, it’s usually best to put the funds in a brokerage account. That way, you can invest in assets that should help you increase your account balance by more than the inflation rate so you won’t lose buying power. And with a long timeline before you need the money, you should be able to wait out any downturns in the market.

You should check your savings account balance to make sure you don’t have money needed for long-term goals or too much emergency fund money. If you find that you do have these funds in savings, consider moving the money elsewhere to make better use of it.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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