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Can you put too much in your savings account?

February 17, 2021
man thinking about money

 

It sounds counter-intuitive but, yes, you could actually be accumulating too much money in your savings account.

With the effects of the COVID pandemic hitting every sector of our economy, many Americans are focusing more on their financial health.  For some, that means establishing or building an emergency savings fund to help weather unexpected problems. 

But there are also those who have actually been able to accumulate savings as a result of shelter-in-place mandates and other restrictions that limit consumers’ options for spending money on such pleasures as travel and entertainment. A recent MassMutual survey found that more than one in five Americans (22%) saved at least $1,000 last summer during the pandemic.

Maintaining a cash cushion is important. A general guideline is to have three-to-six-months’ worth of living expenses saved to cover unexpected medical bills, major repairs or other emergencies. You can easily calculate this by totaling what you spend each month on rent/mortgage payment, utilities, food, car payments, etc. and multiplying. Given the current uncertainty of the market, you might even want to save a bit more to cover the unforeseen. The goal is to have enough cash that you can easily access whenever you need it without having to rely on credit cards or a personal loan.

But there is a limit.  Hoarding cash and letting your savings balance get too high can actually cause you to lose money. That’s because savings accounts, even high-yield accounts, don’t typically pay out as much as other types of investments that are available to you, which means your savings could be losing its value and purchasing power.

One major sign that you’re keeping too much cash in your savings account is if you exceed the $250,000 limit set by the Federal Deposit Insurance Corporation (FDIC). Few people reach this level, but it’s important to note that most savings accounts only insure your money up to $250,000 per account holder for every account. Any amounts above this are not guaranteed to be reimbursed should your financial institution go out of business.

So, what should you do with your excess cash?

There are a number of options.  First, make sure that you’ve identified the highest interest-bearing savings account you can that meets your needs for convenient access and liquidity. Then turn your attention to some long-term investments. Certificates of deposit (CDs) are one option. Their rates of return are typically higher than a traditional savings account, although they come with restrictions as to when you can access your funds without paying a penalty. CDs can be purchased for a variety of terms, depending on your needs and financial situation. The longer you invest, the higher the interest rate you’ll earn over the term of the investment.

If you have a lot of time before you’ll need your funds, you could look at stocks, which typically return more than many other investments, although they come with added risks.  Keep in mind, though, if you are planning for a large purchase in the near future, such as a new home, car, or college education, the stock market may not be the best option, because dips in the market could mean that your money is not available exactly when you need it.

There are also a number of attractive tax-advantaged retirement accounts to consider. If your company offers a 401k or 403b fund, you could increase your contributions into that account. These accounts typically pay higher rates of return and offer an added tax advantage inasmuch as you don’t pay tax on the amount until you withdraw it (which is often at an older age when you may be in a lower tax bracket). You could also investigate a Roth or a traditional Individual Retirement Account (IRA).  

Unlike an IRA, which offers similar tax advantages to a 401k contribution, a Roth IRA is a special retirement account through which you pay taxes on money going into your account but then all future withdrawals are tax-free. Roth IRAs are preferred when you think your taxes will be higher in retirement than they are right now or if you are trying to balance out your tax advantages and liabilities over time. It’s important to note that both Roth and traditional IRAs have maximum contribution limits.  Always check with your financial planner or accountant to confirm limitations and tax liabilities that are specific to your situation.

As we continue to face the uncertainties of the pandemic, it’s more important than ever to become financially savvy.  Make sure you’ve done your homework on the various savings options that are available to you and then decide how much to put aside and where.

The information and recommendations contained herein is compiled from sources deemed reliable but is not represented to be accurate or complete. In providing this information, neither Cortland Bank or its affiliates are acting as your agent or is offering you any tax, accounting or legal advice. 

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