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Even though Americans were able to stash away around $2 trillion in savings during the pandemic months, times have changed since then. Last year, a report from LendingClub and PYMNTS discovered that 60% of Americans were living paycheck to paycheck. While it’s getting more difficult to save money, if you’ve been consistent with ensuring that you accumulate your funds, you’ll want to make wise choices so that you don’t exceed the amount that banking experts want you to avoid going over when it comes to your savings account.
We will examine how much you should try to keep in your savings account as a general financial principal and what is the maximum amount you should keep in the account.
How Much Should You Try To Keep in Your Savings Account?
“Realistically, you want to work on keeping up to six months of expenses covered,” said Izabella W. Bogumil, a relationship advisor at Addition Financial Credit Union. “That way if anything were to happen with your income, it would give enough of a buffer to find another source of income.”
Most financial experts believe that you should aim to build a healthy emergency fund so that you have the money available to deal with any unexpected expenses that could pop up. As the last few years have shown us, you never know what life can throw at you.
Celine Dutoit, financial research analyst at Magnifina, agreed with this sentiment and noted that you should aim for three months’ worth of living expenses. While in the perfect world, you would have the flexibility to save as much as possible for a rainy day, in reality, you should strive to build up any amount that’s possible within your limits.
The Maximum Amount To Keep in Your Savings Account
“How much to ideally have in a savings account depends on how much of those funds are insured,” Bogumil said. “It’s important not to exceed this insured amount. Each account holder is covered up to $250,000. If there are additional individuals linked to the account, the coverage increases by $250,000 per person.”
Bogumil shared that the NCUA insures funds up to $250,000 at credit unions, while the FDIC insures money at regular banks.
“Most savings accounts in the U.S. are insured by the FDIC up to $250,000 per depositor, per insured bank,” Dutoit said. “Amounts beyond this limit are not protected by the insurance.”
The banking experts agree that you should only have funds in your savings account that are fully insured. Once you cross over the insured threshold, you’re taking on an additional risk with a significant amount of capital.
Why Should You Stay Below $250,000?
“The rationale behind staying within the amount is simple,” Bogumil said. “Life is unpredictable. Things can change in an instant from being stable to chaotic. Unless you have a crystal ball predicting the future, it’s wise to keep your savings within the threshold. Nobody wants to find themselves losing amounts due to circumstances beyond their control.”
While it’s beneficial to remain optimistic, you want to remain realistic when it comes to your hard-earned savings. You don’t want to leave any funds in a savings account without full protection, as the risk isn’t worth it.
Dutoit added, “Additionally, savings account interest rates are often lower than the rate of inflation, which means the purchasing power of your money can decrease over time.”
On top of the insurance risk, you also want to optimize your savings instead of having them sitting around in a savings account that isn’t earning you much interest. You want your money working for you so that you can build wealth over time.
What You Can Do With Your Savings
Once you’ve saved up enough to cover your living expenses for up to six months, you have to decide what you’ll do with your excess funds. Realistically, most people don’t have $250,000 sitting around in a savings account or anything close to that, but once your balance exceeds six months’ worth of living costs, you’ll want to take some proactive measures. Here are a few other options for your money:
- CDs: A certificate of deposit is FDIC-insured and will also provide risk-free growth for your money at a higher rate. The only setback is that you typically have to lock your funds up for a period of time.
- Money market accounts: These are also FDIC-insured for up to $250,000, but they provide a higher rate of return for your funds.
- Investing: If you really want to grow your wealth, investing in some type of IRA or other investment vehicle is a great way to do that. There is more risk here, but the payoff can be a lot better.
Dutoit elaborated, “For those with substantial savings, like a retirement fund, it may be worth exploring investment options that may offer higher returns, such as securities — ensuring long-term growth and financial security.”
The goal is to find ways to grow your money at a quicker rate than inflation once you’ve saved up enough to cover unexpected expenses in a savings account.
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