It’s a nice problem to have to have too much money in your savings account, but it’s not a very frequent one.
Having extra income available beyond an emergency reserve may prevent you from taking advantage of investment opportunities. Playing it too safe with money might result in significant potential costs over many years. We’ll go into more detail about this later.
It’s probably not true that “there’s no such thing as too much money” as you would imagine.
However, the truth is that you shouldn’t retain too much money in your savings account to maximize your net worth, regardless of how much money you have.
Are you one of those individuals who keeps more than a few months’ worth of earnings in a bank account with no interest? Or maybe it’s been accumulating for a while, and you simply haven’t gotten around to figuring out how to maximize your return?
Maybe the pandemic forced you to postpone your vacations and spending plans over the previous several months, leaving you with a large number of extra funds that you’re not sure what to do with.
You’re not alone, so don’t worry! We discuss why having too much money in your savings account can be a problem in this post.
Unfavorable Real Returns
Brian Quigley, finance expert and founder of Beacon Lending shares:
“Although savings accounts are FDIC-guaranteed and among the safest locations to put money for things like emergencies, keeping too much money in a savings account is disastrous from the perspective of an investing plan.
To begin with, savings accounts traditionally provide among of the lowest rates in the world of investing.
They could actually lower your net worth even though it may be a reasonable trade-off for their protection. For instance, the “real return” on money in a savings account is normally negative if taxes and inflation are taken into account.”
This may be made clearer by using a case study from real life. Online savings account yields increased by about 4% in 2022 as a result of the Fed’s aggressive interest rate increases to fight inflation.
Savings enthusiasts rejoiced all around the nation since rates as low as 0.01% had not too long ago been the norm. However, despite that significant change in interest rates, savings accounts still underperformed in terms of actual returns in 2022.
Even if you managed to get a rate of 4%, you would still need to stretch your dollars in a climate where inflation peaked at 9% in June and ended the year at 7.7%.
Even with a savings account rate of 4%, you were still looking at a net real return of between -3.7% and -5% over the course of the year. This was before accounting for taxes, which could have eaten up as much as 20% of your income.
Limits for FDIC Insurance
Azi Azimi, COO of CanXida shares: “There’s another reason you’d want to avoid putting too much money into your savings account if you’re in the fortunate situation of having hundreds of thousands of dollars accessible for savings and investing.
Savings accounts have FDIC protection, although the maximum per account holder is $250,000 per account. Accordingly, if you create a savings account and deposit $1 million, $750,000 of that sum would be in danger if a bank failed.
Despite the fact that you may get around this by creating $250,000 in accounts at other institutions, doing so would undoubtedly complicate your financial situation.
Furthermore, you wouldn’t be investing all of your money in your first pick, by definition. Every new account would probably have features or advantages that weren’t nearly as fantastic as at your preferred bank.”
Substantial opportunity cost
Any extra money in your emergency fund will have a job to do since the interest it produces won’t even come close to equaling the rate your credit card issuer takes from your revolving accounts, whether it is in a high-yield savings account or an MMA.
I would put any additional money towards any debt first. Then, if I were saving for a large purchase in the near future, I would think about making some interest-only payments on my house loan and adding any leftover money to another savings account.
In the absence of any of those situations, consider investing in securities such as certificates of deposit or index funds that provide greater returns than a standard savings account.
However, if you see any excess-savings warning signs, you should aim higher than CDs.
If you see these indicators, think about investing a portion of your savings in varied assets, such as stocks, bonds, and real estate, to help your money increase over time.
You may lessen your dependence on cash reserves alone as your investment portfolio grows.
Just keep in mind that although it’s wonderful to see your savings increase, there is such a thing as too much good. Too much cash on hand has an opportunity cost.
Due to inflation, that money loses buying power every year.
The only way to outperform inflation over the course of your lifetime is to put aside extra money and invest it in a variety of stocks, properties, and other assets that provide returns that are greater than inflation.
Percy Grunwald, finance expert and founder of Compare Banks shares: “Additionally, having too much money might put you in a position to make reckless errors. Cash preservation is an indication that your business has reached a comfortable stage.
You can make decisions in a reactionary manner rather than looking for fresh development tactics.
With more wealth, it is simple to just throw money at issues like legal costs, maintenance requirements, and human resources. Even while these expenditures are often justifiable, having too much money might lead to leaders skipping out on standard due diligence.”
Money may contribute to friction inside an organization, just as it can lead to greed in people.
If you run your business as a corporation or partnership, numerous executives will have a stake in the choices you make in terms of strategy.
Fights about whether to keep money on hand, reinvest it, or share profits with investors may arise. If you decide to hang onto cash, there’s a chance that some investors may get impatient with the delays in their investment returns.