Why I Don’t Keep More Than $20,000 in Savings

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I want enough money in my savings account to cover three to six months of living expenses, fund vacations, and pay for big purchases. Find out why I don’t want more. 

I have multiple savings accounts. But, except in special circumstances, I do not keep more than $20,000 total across my accounts. I don’t want to exceed this amount in most cases for one very important reason.

Here’s how I decided on my $20,000 cap, along with some insight into why I feel it’s important not to have too big of a balance in my savings account.

I keep the bare minimum I need in savings to feel comfortable

The reason I keep about $20,000 in savings is because I need this money to be accessible.

The $20,000 in my savings accounts includes my emergency fund, which is money I’ve set aside to cover several months of living expenses. It also includes money I’m saving for short-term purchases like vacations or car repairs.

I don’t want to invest this money because I cannot afford to lose it and I don’t want to be afraid to take the money out of a brokerage account if I need it. In a savings account, there’s no risk my funds will be lost or that I’ll feel bad about selling before my investments have a chance to make me money.

The rest of my money earns better returns in my brokerage account

I don’t keep more than $20,000 in my savings account because I will not need to have more than this amount readily available. It’s very unlikely there would be a scenario where I would need more than $20,000 for emergencies or large purchases in the short term.

My savings account pays a pretty low interest rate compared to my investment account. I’m currently earning a 3.85% APY on my savings. While I could perhaps move banks to get a slightly higher APY, I’m not likely to earn above 5% in a savings account.

In my brokerage account, though, I’m invested in index funds that track the performance of the S&P 500. This index has produced average annual returns of around 10% for decades. I would personally rather earn 10% on my money than 3.85% on my money, even if doing so means I’m taking on more risk since it’s possible to suffer losses — even when invested in the S&P 500 — if you have a short investing timeline and end up selling at a bad time.

The difference really adds up

For every $1,000 I have invested in my savings account earning 3.85%, I can earn about $38.50 in interest during a year. If that same money earned me 10% instead, I’d earn around $100 in interest. I can’t afford to just pass up all that extra money, and I don’t want to — so that’s why I won’t keep more money in savings than I absolutely must.

When you decide where to put your money, be sure to consider risk and return — including the risk of being too conservative in your investing. You may just decide that you should cap the amount you put in savings as well, and start funneling as much spare cash as you can into a brokerage account where you can earn a return more conducive to building wealth.

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