How Much Is Too Much To Put Into A Savings Account?

Having cash in savings gives you security — the ability to handle a surprise car repair, a medical bill, or a sudden job loss without going into debt. But there’s a real cost to keeping too much money in a savings account, and it’s one a lot of people overlook.

The issue isn’t safety. A savings account at an FDIC-insured bank protects your money up to $250,000 per depositor, per account ownership category. The issue is what your money could be doing instead.

What’s the downside of keeping too much in savings?

The main risk is opportunity cost. Every dollar sitting in a low-interest savings account is a dollar that isn’t growing at a higher rate somewhere else.

Here’s what that looks like in practice: if you have $20,000 in a traditional savings account paying the national average of 0.39% APY, you’d earn about $78 in interest over a year. That same $20,000 in a high-yield savings account paying 4.00% APY would earn roughly $800 — a difference of more than $720. And if inflation is running at 2.9%, your money in that low-yield account is actually losing purchasing power every year.

There’s also the FDIC insurance ceiling to consider. Coverage maxes out at $250,000 per depositor, per ownership category at each FDIC-insured bank. If you have more than that in a single account type at one bank, the excess isn’t protected. Learn how FDIC insurance works and how to maximize your coverage.

Beyond the insurance threshold, the biggest concern is simply that cash in savings doesn’t grow. It preserves — and in a low-rate account, it doesn’t even do that well after inflation.

How do you know if you have too much in savings?

A few signs suggest your savings balance is higher than it needs to be:

• You’ve fully funded your emergency reserve and short-term goals. Once those are covered, additional cash in savings isn’t serving a clear purpose. It could be working harder in a CD, money market account, or investment account.
• Your cash is losing ground to inflation. With inflation around 2.9% and the national average savings rate at 0.39% APY, money in a traditional savings account is losing roughly 2.5% of its purchasing power each year. A high-yield savings account narrows this gap significantly — and at 4%+ APY, you’re actually beating inflation.
• You have other goals better suited for different accounts. You have long-term financial goals, such as saving for retirement, that don’t require money in an easily accessible savings account, but rather, an investment account (which has more risk).

When holding more cash in savings actually makes sense

“There are absolutely times when holding more cash makes sense, even if it seems like ‘too much’ by traditional standards,” says Hanna Horvath, CFP® and Managing Editor at Bankrate. “If you’re within a few years of retirement, having one to two years of expenses in high-yield savings protects you from being forced to sell investments during a market downturn.”

The same logic applies to college savings when your child is a junior or senior in high school, Horvath explains. “You don’t want to risk a market crash right before tuition bills are due. Consider moving college funds from investments to savings accounts about a few years before you’ll need them.”

Other situations where a larger cash cushion makes sense: job uncertainty or a shaky industry, major planned expenses like a home renovation or home purchase, self-employment with irregular income, or high-deductible insurance plans where an unexpected claim could cost thousands.

“The key is being intentional about it — know why you’re holding the cash and have a specific timeline for when you’ll use it,” Horvath says.

How much should you keep in an emergency fund?

Most financial experts recommend three to six months of essential expenses — not income, but the actual costs you’d need to cover if your income stopped: housing, food, utilities, insurance, transportation, and minimum debt payments.

Your specific number depends on your situation. You may want more if you have unstable or irregular income, are self-employed, carry high insurance deductibles, are approaching retirement, or support dependents.

You may be comfortable with less if your monthly expenses are relatively low (no mortgage, for example), you have no dependents, or you have other safety nets like a partner’s income or strong job security.

If you don’t have an emergency fund yet, start small. Even $500 set aside creates a buffer against the most common financial emergencies. Build from there toward one month of expenses, then three, then six. Analyzing your budget can help you figure out exactly how much you need and how quickly you can get there.

Figure out your short-term financial goals

Your financial goals can have a major impact on how much money you want to set aside in lower-yielding deposit accounts versus investments with greater growth potential like stocks. While investment accounts, such as a 401(k) and Individual Retirement Account (IRA), for example, may be good options for long-term goals, such as retirement, it may not be suited for money you want to access in the short-term.

For example, if you want to make a significant purchase — such as buying a home — in the near future, it makes sense to have a large amount of money in a savings account or CD. The last thing that you want is to save for a down payment by investing your money in the stock market, only to have your investments plummet in value as you start house hunting.

You will likely have other short-term saving goals as well that are best suited for a savings account. Some examples of potential short-term goals include:

• Travel
• Buying a home
• A wedding or other specific event
• Home renovation
• Buying a car
• Holiday gifts and expenses
• Other large purchases

Bottom line

Having significantly more money in a savings account than you would need for emergencies can mean you’re losing out on higher potential returns elsewhere. Once you’ve built up savings for emergencies and short-term goals, additional funds could be earning better interest in FDIC-insured CDs or money market accounts, as well as stocks, bonds or mutual funds.