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You don’t want to have too little or too much savings. Here’s how to strike a good balance. [[{“value”:”
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Many of us take the money we have in the bank for granted. But as of 2022, a good 37% of Americans could not afford an unplanned $400 expense, according to the Federal Reserve. So if you’re in a position where you’re wondering if you have too much money in savings, that’s a pretty good place to be.
At the same time, you don’t want to overfund your savings account, because doing so could mean missing out on better returns elsewhere. It’s important to try to strike the right balance.
The best way to use a savings account
A savings account is a good place to park some cash for near-term purchases. And you should also make it your emergency fund’s home.
To figure out if you’ve overfunded your savings account, you’ll need to decide how much money you want on hand for unplanned expenses. The general rule of thumb is to keep enough cash around to cover at least three full months of essential bills. Beyond that, there’s wiggle room.
Depending on your comfort level and the type of job and expenses you have, you may decide that you need a six-month emergency fund. Or, you may even want more protection than that, which is totally fine.
Of course, if you’re going to maintain a larger emergency fund, you should try to earn the highest return on it possible. Click here to see our list of the best high-yield savings accounts.
But if you have money in a savings account beyond what you need for an emergency fund and near-term expenses or goals, then it’s a good idea to try to find the rest of your cash a new home.
You can do more with your money by investing it
Sometimes, it’s worth giving up a larger return on your money for peace of mind. You should never invest your emergency fund because if it loses value, you may not be able to cover whatever expense you’re facing.
But for money that’s not earmarked for emergencies, investing is the way to go. That’s because the stock market is likely to deliver a much higher return on your money over time than a savings account will.
Right now, savings accounts are paying around 4% to 4.5%, but these rates aren’t the norm. And they’re likely to fall as the Federal Reserve continues to lower its benchmark interest rate.
But the S&P 500’s average annual return over the past 50 years is 10%. So if you invest extra money in a similar index fund for several years or decades, there’s a good chance your portfolio will do similarly. For example, if you invest $5,000 today at a yearly 10% return, in 25 years, you’ll be looking at over $54,000.
Now, you may be thinking, “OK, sounds good, but how on earth do I find the right stocks to pick?” But don’t worry if you don’t know much about investing. Most brokerage accounts make it easy to load up on investments like S&P 500 ETFs (exchange-traded funds), which basically allow you to put your money into the broad stock market without having to be an expert.
Check out our list of the best online brokerage accounts so you can start putting your extra money to work.
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