How Much Money Is Too Much To Keep in Your Savings Account?

John Csiszar  Mon, February 13, 2023

Can you have too much money in the bank? On the one hand, there’s an obvious joke answer to this commonly asked question — there’s no such thing as “too much money.” The reality, however, is regardless of how much money you have, in order to maximize your net worth you shouldn’t keep too much money in your savings account.

While savings accounts serve valuable functions, they aren’t “investments” in the strictest sense of the word. As you’ll see below, savings accounts typically act as a drag on your portfolio rather than an enhancement. That’s why there is definitely such a thing as having “too much money” in your savings account.

Negative Real Returns

Although savings accounts are FDIC insured and among the safest places to keep money for things like emergencies, in terms of an investment strategy, having too much money in a savings account is catastrophic. For starters, savings accounts typically pay among the lowest yields you can find in the investment world. While this may be a fair tradeoff for their security, they may actually reduce your net worth. After you factor in inflation and taxes, for example, the “real return” you earn on money in a savings account is typically negative.

Using a real-world example can help make this clear. In 2022, online savings account yields jumped up close to 4% thanks to the Fed aggressively raising interest rates to combat inflation. Across the country, savers jumped up and down with glee, as rates as low as 0.01% had been the norm in the not-too-recent past. But even with that major move in rates, savings accounts were still losers when it came to real returns in 2022.

Even if you could snag a rate of 4%, you’d have to make that money stretch in an environment where inflation topped 9% in June and finished the year at 7.7%. Net-net, even with a 4% savings account yield, you were looking at a negative real return somewhere between -3.7% and -5% throughout the year — and this was before factoring in taxes, which could have taken a bite of 20% or more out of your 4% yield.

FDIC Insurance Limits

If you’re in the fortunate enough position that you have hundreds of thousands of dollars available for savings and investments, there’s another reason why you’d want to avoid putting too much money into your savings account. While savings accounts carry FDIC insurance, the amount is limited to $250,000 per account holder for every account. This means if you open a savings account and dump in $1 million, $750,000 of that would be at risk in the event of a bank failure.

To continue reading, please go to the original article here:

https://finance.yahoo.com/news/much-money-too-much-keep-190015526.html