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Can you keep a lot of money in the bank? On the one hand, there is an obvious joke answer to this frequently asked question. There is no such thing as “too much money”. But the reality is that no matter how much money you have, you shouldn’t keep a lot of money in your savings account to maximize your net worth.
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A savings account serves a valuable function, but it is not an “investment” in the strict sense of the word. As you can see below, a savings account typically acts as a portfolio drag rather than a portfolio enhancer. So there is no doubt that you have “too much money” in your savings account.
negative real return
A savings account is insured by the FDIC and is one of the safest places to keep your money in case of emergencies. Having money is devastating. First, savings accounts usually pay among the lowest yields you can find in the investment world. While this may be a fair trade-off for their security, it can actually reduce your net worth. is usually negative.
A real example will make this clear. In 2022, his online savings account yields will jump to nearly 4%, thanks to the Fed’s aggressive interest rate hikes to fight inflation. Until recently, interest rates as low as 0.01% were the norm, causing savers across the country to jump for joy. But even with the big move in interest rates, savings accounts were still the losers when it came to real returns in 2022.
Even if you can hit the 4% rate, you’ll need to stretch that money in an environment where inflation topped 9% in June and ended the year at 7.7%. Even with a net net, savings account yield of 4%, we were seeing negative real returns anywhere between 3.7% and -5% throughout the year. More than % out of 4% yield.
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FDIC insurance limits
If you’re lucky enough to have hundreds of thousands of dollars available to save and invest, there’s another reason not to put too much money in your savings account. His FDIC insurance covers savings accounts, but the amount is limited to $250,000 per account holder for each account. So if he opens a savings account and puts in $1 million, $750,000 of that is at risk if the bank fails.
You can get around this by opening $250,000 accounts with various banks, but it certainly complicates your financial life. there is no. All additional accounts may have features and benefits not as great as your favorite bank.
Alternative option
One of the reasons you don’t want to put too much money in your savings account is because it comes with a large opportunity cost. Money deposited in a savings account cannot be used to invest in alternatives that offer higher potential returns.
For example, even if you can find a savings account that yields 4%, that’s a far cry from the US stock market’s long-term average return of nearly 10% annually. Remember, a savings account is a great place to store emergency funds or other short-term cash that you need to have quick access to. It should not be the cornerstone of long-term financial planning.
So what is a magic number?
As with most things in the investment world, there is no single number for the right amount of money to keep in a savings account for everyone. However, many experts recommend setting aside about three to six months of living expenses in a savings account if you have a steady job.
If you are unsure of the security of your job, whether you are a freelancer or retired, it is a good idea to add to it. It’s also a good vehicle if you’re saving for a short-term goal. In such cases, you should change the amount in your savings account accordingly.
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