Can You Ever Really Have Too Much Money In Your Savings Account?

It turns out that too much of a good thing can, in fact, be bad. While ensuring you have a well-funded savings account can be vitally important in case of an emergency, there is a limit on how much you should be keeping in an account like this. From the risk of loss to ever-growing inflation, there are a host of reasons why having too much money in a savings account might actually be working against your own interests (and interest, pun intended).

For starters, the Federal Deposit Insurance Corp. (FDIC) insured banks guarantee up to $250,000 per account in the event your bank should fail. This means that the federal government will protect your savings up to that amount, but not more. So, any decision to exceed that total in a single account could put you at risk of losing your money should your bank fold. Even if the chances of your bank failing are unlikely, consider the FDIC's Failed Bank List which includes 567 banks that have failed since 2000. The best rule of thumb is to keep at least three to six months' worth of living expenses in your savings for emergencies, but if you have savings beyond that amount you might want to explore other options.

The pros and cons of keeping money in your savings account

There are plenty of reasons to keep money in your savings account, and the preference for a savings account vs. something higher risk like an investment comes down to comfort level. One of the big downsides of having a large chunk of money in a savings account is that the money does not grow at the same rate that it could with higher-risk financial decisions. Plus, after factoring in inflation, the money you leave in savings might not have the same purchasing power down the line when and if you do choose to spend it. This is why moving anything above your emergency savings cushion to something more lucrative can be important.

On the flip side, savings accounts allow you to always have easy access to your money if you need it. This is perhaps the biggest difference between keeping your money in savings vs. tied up in something like an IRA, CD, or other investment option. There are also no penalties or fees for withdrawing money from your savings (though always review your bank's policies for required minimums) which distinguishes these accounts from other options. Plus, the only taxes applied to a savings account are on the interest you earn from that account as opposed to being taxed on any withdrawals. This makes the money in savings easier to access and use, which can be a pro or a con depending on your spending habits and temptation levels.

Making your savings work for you

Not all savings accounts are created equal and finding one with better terms and rates can help ensure your savings grow in a low-risk way. Different savings accounts offer different APY (annual percentage yield) and this rate can have a lot of variety. The national average APY rate is 0.45% but many of the big banks (like Chase for instance) offer as low as 0.01% APY on their savings accounts. Online banks typically offer far more competitive APY savings rates that can range from 4.35% to over 5%. This higher APY can ensure that your money is growing while still sitting in a more accessible savings account.

If you're looking for a way to reduce the amount you keep in a savings account, there are plenty of options available. A popular choice for those looking for longer-term savings plans is an IRA (individual retirement account) or Roth IRA. These function as long-term savings accounts for retirement and can offer higher rates of return than regular savings accounts with various tax-deductible options depending on the type of account you choose. Other ways to roll your extra savings into higher yield outcomes can include CDs, money market accounts, mutual funds, bonds, stocks, or even by making higher contributions to your workplace 401k or 403b accounts (provided your workplace has these). All of these options offer their own pros, cons, and risk levels which can be best explained by your financial advisor.