How Much is Too Much to Keep in a Savings Account

You should never keep more than $250,000 in a savings account since that’s the maximum for the Federal Deposit Insurance Corporation (FDIC) insurance. The ideal amount is no more than six months of your take-home pay.

As you seek ways to maximize your income and put your money to work for you, you might wonder, how much money should I keep in my savings account? The answer that applies to everyone is no more than $250,000, because that’s the maximum amount of FDIC insurance on traditional savings accounts. However, the real answer is — ‘it depends.’ Read on to learn more about how to calculate the best amount to hold in savings and how much to invest elsewhere.

How Much Money Should I Keep in My Savings Account?

When calculating how much to keep in your savings account, you need to consider your emergency fund. An emergency fund is the money that you keep on hand in case of unexpected expenses, changes in income or any sort of uncertainty. This money should be quick and easy to access at all times. The general recommendation is to have six months of your take-home income in case of something unexpected.

The challenge is that money held in a traditional savings account only gets a small fraction of interest, which means it isn’t even keeping pace with inflation or pay increases that you might receive annually. That means you’ll constantly need to add to it as your money sits and depreciates.

Not only is your money not keeping pace with inflation when held in a savings account, but it also is missing out on the opportunity to grow. 

The answer to how much you should keep in your savings account will vary based on your comfort level. Ideally, you should open a high-yield savings to at least keep the money growing based on inflation. The interest rates are variable in high-yield accounts but are far better than the average savings account. 

All additional funds over six months of take-home pay should go into investments or a certificate of deposit. CD accounts are currently earning around 5%, which is higher than the average high-yield savings, which is around 4% currently. When managed well, the average investment account earns 6-10% annually.

The exact amount to keep in savings varies from person to person. But for the average $60,000 per year salary in the U.S., that means six months of take-home pay would be $23,922 that you should hold in a mostly liquid place, such as a high-yield savings account.

Should You Keep a Lot of Money in Your Savings Account?

You should not keep more than six months of your take-home pay in a savings account. Here’s why:

• The money won’t keep pace with inflation.
• Any funds over $250,000 won’t be insured, which means if your bank fails, you lose all funds over $250,000.
• You’re missing out on the opportunity to grow the funds through more aggressive avenues, such as investments, bonds or a CD account.
• You can earn better interest from other account types, such as a high-yield savings account or CD.
• You’ll need to contribute to your savings account as you earn wage increases or as inflation goes up to ensure it stays a good safety net in case anything unexpected happens.

What You Should Have Saved

You should save six months of take-home pay. Look at your paycheck to see the net pay, that is the pay after deductions for taxes, insurance or other expenses, such as parking. Then multiply that number times 6. 

If you are a two-income household, you might be able to put away three months of take-home pay per person. However, ensure that this amount would still cover your expenses if both incomes are lost simultaneously. While this scenario would be very rare, it’s wise to have the liquid funds to cover it just in case. 2-income households also tend to have larger homes, more expensive cars and more dependents. That means that there are more chances for unexpected expenses, such as a new water heater or a large hospital bill.

Consider your long-term goals. Look at what you’re saving for, such as a new vehicle, home, furniture or other large purchase. Consider how you can start putting money back for these items each month and add these to your savings. You can use a spreadsheet to monitor how much you’ve saved toward your long-term goals to help you stay on track and know when you’re ready to make the purchase.

How Much to Save Each Month

You should save 20 percent of your income each month. If you make $60,000 per year, your take-home pay is $3,987. This means you should save $797.40 per month if you’re saving 20%. Once you’ve put back enough for an emergency fund, this money should go into investments. If you hope to use those savings in the next few years, try to keep the funds in low-risk investments, such as bonds or a CD account. But if you don’t plan to use it quickly, place it in longer-term investments.

The more you can save, the more passive income you can potentially earn from investments and return on your funds.

How to Maximize Your Savings

As you ask yourself how much should you have in savings, consider these ways to maximize your savings and reach your goals.

• Learn how to budget: Sticking to a budget can be challenging, but mastering it will assist you in saving and achieving your goals. Use an expense tracker or a budgeting app to learn where your money is going.
• Reduce, then eliminate debt: Reducing your debt allows for greater savings. Debt makes everything cost more. Pay down your debt as much as you can, especially when the interest on the debt is over 4-5%, which is what you can earn with low-risk investments.
• Automatically move money to savings each month: If you automate a transfer from your checking account after you get paid, you’ll maximize your savings and discipline yourself to set that money aside.
• Set spending limits: Some credit cards allow you to set spending limits and alert you when you’re getting close. This will keep you honest in your budgeting and maximize your savings. Cancel a credit card if you have too much to manage and can’t track your spending properly.
• Find a side hustle: Sometimes no matter how much you reduce your expenses to the bare minimum, it isn’t enough to help you start setting aside funds. In those cases, a side hustle can help. Look into side hustles that empower you to earn some extra cash doing things you enjoy, such as walking dogs or getting crafty.
• Get a high-yield savings account: These accounts help your money keep pace with inflation and perhaps earn a little on top of that.
• Keep only your emergency fund in savings: Move everything else to investments with better returns to keep your money working for you.
• Hold the funds in a Certificate of Deposit (CD) when you don’t need it immediately: A certificate of deposit is a low-risk place to hold funds while earning decent interest rates. Use these accounts when you don’t need immediate access to your savings and feel confident you have enough in savings in case of an emergency or unexpected expense.
• Never hold more than $250,000 in one account: To protect your savings, keep your balance below $250,000 with any one bank. You can move some of the funds to another bank account to keep it protected in case your bank falters.

Save for Your Emergency Fund Then Invest the Rest

Ultimately, the only funds held in your savings account should be your emergency fund. Once you've established your emergency fund, invest any additional funds that will help your money grow and become a passive source of income for you. If you need the funds in the next few years for a large purchase, invest the funds in low-risk places, such as bonds, a CD account or other low-risk locations.