Are you saving too much money? 5 places to put extra cash

Advertiser Disclosure: Content provided by Bankrate.com. Fox Business and its content partners earn compensation from the affiliate companies that appear below. This content does not include all available financial offers, and compensation may impact how and where links appear in the content.

Saving money is a smart financial habit — but you can have too much of a good thing.

It’s important to have a safety net, but placing excessive money in a traditional savings account may not earn significant returns. Inflation can also erode the purchasing power of your savings over time.

While having too much savings may sound like a good problem, there are costly drawbacks to consider.

The problem with too much savings

The idea of having too much money in your savings account may seem counterintuitive. But saving too much means you could miss the opportunity to make your money work harder for you. Keeping your money in a traditional savings account may limit your potential to build wealth.

Many savings accounts offer low interest rates that may not keep up with inflation. This means that over time, the value of your savings could be eroded.

While the average savings account interest rate is 0.57%, most traditional savings accounts come with interest rates as low as 0.01%. This is essentially the same as keeping your money in cash.

“There is an opportunity cost to holding onto too much cash. Each year, those dollars lose purchasing power as a result of inflation,” says Christopher Stroup, certified financial planner at Abacus Wealth Partners.

If you're saving a considerable amount in a traditional savings account, you may miss out on opportunities to grow your wealth or generate higher returns.

“The only way to outpace inflation over your lifetime is to invest excess cash in a diverse mix of stocks, real estate, and other assets that generate returns higher than inflation,” says Stroup.

But you do need to keep some of your money more accessible and safe in case of an emergency. One way to keep your more liquid while earning more interest is through a high-yield savings account. These accounts, offered by online banks, come with higher interest rates and are as secure as big banks.

This way, you can better protect your savings from inflation and build a solid financial future.

What’s the right amount to have in savings?

The right amount to have in savings depends on your finances, goals, and risk tolerance. Here are some questions to help you come up with the magic number.

Is your emergency fund adequate?

As a general rule, you should keep three to six months' living expenses in an emergency fund. This provides a buffer in case of unexpected events like job loss, medical emergencies, or major repairs.

Do you have one stable income or several fluctuating income streams? Inconsistent income means you may have to dip into your savings more than expected so that you could benefit from a larger emergency fund.

It’s equally important to evaluate your expenses. How do your needs stack up to your wants? Do you have a lot of disposable income each month, or is money tight? If you or your partner lose your job, can your household stay afloat and meet the basic needs on a single income?

Could you handle a financial emergency without leaning on credit cards or other forms of debt to get by?

These are all factors to consider when determining how big of an emergency fund you need.

What are your short- and long-term financial goals?

Beyond your emergency fund, consider your short-term goals, such as saving for a vacation or buying a car. Allocate a specific amount towards these goals based on their priority and timeline.

For long-term goals like retirement, it's recommended to save a percentage of your income consistently over time. Experts suggest saving around 10-15% of your income for retirement. This can vary depending on your age, expected retirement age, and desired lifestyle in retirement.

If you have other goals like saving for a down payment on a house or funding your child's education, determine how much you need to save and create a plan.

Where to put your excess savings

“Once you've reached your emergency fund goal, stop saving for it. Redirect the excess cash above this cap to other goals, such as investment accounts oriented towards retirement,” says Stroup.

Here’s where to put the extra cash:

1. High-yield savings accounts: These accounts offer higher interest rates compared to traditional savings accounts, allowing your money to grow at a faster pace while maintaining liquidity.
2. Certificates of Deposit (CDs): CDs offer a fixed interest rate for a specific period, ranging from a few months to several years. By locking in your money, you can earn higher interest rates than regular savings accounts. Keep in mind that early withdrawals may incur penalties.
3. Investment accounts: Consider opening an investment account to explore stocks, bonds, mutual funds, or exchange-traded funds (ETFs). These investments have the potential for higher returns over the long term but also have higher risk.
4. Retirement accounts: Maximize contributions to tax-advantaged retirement accounts such as 401(k) or individual retirement accounts (IRAs).
5. Real estate: If you have a higher risk tolerance and a longer investment horizon, you may consider investing in real estate. This can be through purchasing rental properties, real estate investment trusts (REITs), or real estate crowdfunding platforms.

The bottom line

Saving money is an integral part of a healthy financial plan. But it’s possible to put too much in a savings account and miss out on potential returns. That’s why it’s vital to find the right balance between saving and investing.

When managing your savings, set realistic savings goals and create a diversified portfolio. It’s also essential to review and adjust your savings strategy over time to ensure it aligns with your overall financial goals.

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.