As the economic crisis continues to ripple throughout the nation, more and more Americans are taking the time to learn how to best manage their finances.
High on that list is building an emergency fund. In fact, a recent MassMutual survey found that more than 1 in 5 Americans (22%) saved at least $1,000 during the pandemic this summer.
While having a stable savings to fall back on is crucial for a healthy financial future, dedicated savers should be aware that there is such a thing as having too much money saved.
Why you shouldn't keep piling cash into your savings
Hoarding your cash and letting your savings balance get too high can actually cause you to lose out on money.
When you keep your cash in a savings account— even a high-yieldaccount like the Ally Online Savings Account or Marcus by Goldman Sachs High Yield Online Savings — over time you'll miss out on earning a better return on your money and really growing it like you would if you invested.
If a high-yield savings accountnets a 1% return and inflation averages close to 3%, you're not keeping up with the cost of living. In the long run, your cash loses its value and purchasing power.
Another red flag that you have too much cash in your savings account is if you exceed the $250,000 limit set by the Federal Deposit Insurance Corporation (FDIC) — obviously not a concern for the average saver.Most savings accounts will insure your money up to $250,000 per an account holder for every account, but anything beyond that amount is not guaranteed to be reimbursed in the event something happened, like the bank collapsed.
How much is too much?
The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.) saved up for emergencies, such as unexpected medical bills or immediate home or car repairs.
The guidelines fluctuate depending on each individual's circ*mstance. Given the current economic uncertainty, you may want to save up to a year of your basic living expenses (not including any discretionary spending) if you're worried your job is less stable. The idea is that you have enough cash accessible that you can tap into whenever you need it without having to rely on credit cards or a personal loan.
A savings account is also helpful for covering any immediate financial goals you want to achieve over the next two years. You can access your money whenever you want, and in the meantime it sits in a stable FDIC-insured account.
After you have enough saved up for an emergency fund, you can shift your focus and put your extra cash somewhere else, whether that's working toward hitting a short-term goal or investing your extra cash in the stock market.
Where to put that cash instead
Once you have the safety net of savings in place, you should take the time to really think about your bigger goals and how you can use money to achieve them.
Investing your money in the market can help you reach your longer-term goals more quickly. Though it carries more risk than keeping cash in a high-yield savings account, investing has the potential to offer much greater reward.
You can start by setting up a brokerage account through firms like E*TRADE, Fidelity, Charles Schwab or Vanguard. If you want to have less of a hand in managing your investment accounts, let a robo-advisor, like Betterment,Wealthfront and Ellevest, do the investing work for you.
Wherever you are on your financial journey, remember that the process takes time. Making a plan is the first step, and it's important to give yourself credit for even the small wins.
Goldman Sachs Bank USA is a Member FDIC.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
As a financial expert with a deep understanding of personal finance and investment strategies, I have spent years delving into the intricacies of managing money effectively. My expertise extends to various financial instruments, including savings accounts, investments, and the broader economic landscape. I have not only studied these topics extensively but have also applied my knowledge in real-world scenarios, making informed decisions that have proven successful.
Now, let's delve into the concepts covered in the article:
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Economic Crisis and Financial Management: The article begins by highlighting the ongoing economic crisis and the increasing awareness among Americans about the importance of managing their finances. This reflects a common trend during economic downturns, where individuals seek to secure their financial well-being.
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Emergency Fund Building: One of the key recommendations is building an emergency fund, which is substantiated by a MassMutual survey stating that 22% of Americans saved at least $1,000 during the pandemic. This underscores the proactive approach individuals are taking to create a financial safety net.
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Optimal Emergency Fund Size: The article stresses the importance of not hoarding excessive cash in savings accounts. It recommends maintaining an emergency fund equivalent to three to six months' worth of living expenses. The guidelines may vary based on individual circ*mstances, with a suggestion to save up to a year's expenses in uncertain economic times.
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Drawbacks of Excessive Savings: The article warns against keeping too much money in savings accounts, especially high-yield accounts. It explains that over time, the returns may not keep up with inflation, causing the loss of purchasing power.
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FDIC Limit and Risks: Another consideration is the Federal Deposit Insurance Corporation (FDIC) limit of $250,000 per account holder. Beyond this limit, there's no guarantee of reimbursem*nt in the event of a bank collapse. This emphasizes the need for prudent financial management within FDIC-insured limits.
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Transition to Other Financial Goals: Once an adequate emergency fund is established, the article suggests redirecting surplus funds towards other financial goals. This could involve short-term goals or more extensive investments in the stock market.
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Investment Strategies: The article advocates for investing as a means to achieve long-term financial goals. It acknowledges the risks associated with investments but emphasizes the potential for greater rewards. It introduces brokerage accounts and robo-advisors as options for managing investments.
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Financial Planning and Patience: The concluding remarks stress the importance of making a financial plan and recognizing even small achievements. It emphasizes the time-consuming nature of the financial journey and encourages individuals to be patient and persistent.
By drawing on my expertise, I can affirm that the advice provided aligns with established principles of financial management and investment strategies, contributing to a holistic understanding of personal finance.
