We’ve all heard the statistics about people not having enough savings to cover unexpected emergencies that may occur. But, we don’t hear as much about people who are in the opposite position — too much money in their savings account. While it’s not exactly a bad problem, saving too much money in a savings account could be keeping you from potential growth and earnings on your money.
“We hear about this ‘problem’ often,” stated Chelsea Fry, Director of Retail Delivery Services at Diamond Credit Union, “and what a great ‘problem’ it is to have! There are simple options available to have your money work harder for you and they are often forgotten or overlooked.”
How Much Money Should I Keep in My Savings Account?
It’s always recommended that your first savings goal be to build an emergency savings fund. This is money that is readily available for use when unexpected costs arise that you haven’t budgeted for — a medical emergency, a home or car repair, or loss of employment. A savings account is a perfect place to keep your emergency savings. If you do tap in to your emergency fund, don’t forget to make deposits to replenish the accessed funds.
Emergency savings should be large enough to cover up to six months of expenses, and that amount will be different for each person or each family. To determine your personal emergency savings, look at what you are spending each month on living expenses (rent/mortgage, food, utilities), fixed payments (student loans, car payments, insurance) and fluctuating payments (credit card bills). After determining your monthly total, multiply it by six.
Holiday and Vacation accounts are additional savings accounts you can open to keep money that you have earmarked for a specific, short-term goal. For example, if you plan on helping your teen buy a car, starting a home remodel, or paying for an upcoming vacation, these savings accounts allow you to keep that money readily available and is an easy way to budget for more than one goal at a time.
Where Should I Save My Money?
Traditional Savings Accounts
Many people keep an amount in their savings account that is above and beyond their emergency cushion. They choose savings accounts because they want the ability to access their money at any time, without penalty. But without a short-term goal, keeping tens of thousands in a traditional savings account means you’re missing out on interest and investment growth.
The money in a savings or investment account grows through the process of compounding interest, which can have a positive effect on your money. If your account balance is $1,000 and it earns 1%, after one year your new balance will be $1,010. In the next year, you’d earn 1% on the original $1,000 and also the $10 in interest, and so on for years to come.
Unfortunately, traditional savings accounts don’t typically carry high-interest rates. You may only be earning 0.25%. But, by moving your excess savings into a different type of deposit account, you can increase your interest earnings through compounding interest. Here are other savings and investment options that you can explore:
Investment Savings Account
High-Yield Savings — If you’re not a risk taker, then high-yield savings accounts are safe alternatives and are offered with many rates and terms. Investment accounts, like share certificates and money market accounts, can offer interest rates that can reach several percentages higher than traditional savings. Share certificate rates are locked in for the term chosen. Money Market Accounts are typically tiered, and the rate would correspond to the balance, however, be aware that falling below the minimum balance requirement may subject your account to incur a fee. It’s important to be aware of the specific account details and monitor your account accordingly.
401(k) — If you’re ready to move beyond traditional savings, take a closer look at your employer-sponsored 401(k) account. Individuals have the opportunity to contribute up to $19,000 per year through a 401(k) plan. Additionally, you may be able to maximize your 401(k) savings if your employer has a match plan. In many instances, your employer will match your 401(k) contribution, usually with a maximum match of 3-6% of your salary.
IRA Retirement Fund — If you’ve gone as far as you can with your employer’s 401(k) plan, or if your employer does not offer a plan, consider putting your excess savings to work for you with an Individual Retirement Account (IRA). An IRA is not dependent on your employer and you can open an account at your credit union, bank, or through a wealth management advisor. Similar to a 401(k), an IRA is an investment account that can include stocks, bonds, or mutual funds. They also have an annual contribution limit which is currently $6,000 per year. If you need your money to be flexible and accessible, this may not be the best option for you as there could be penalties for early withdrawal and could have tax implications. It is best to speak with a tax advisor before opening an IRA account.