You'll often hear that it's important to have money set aside for emergency expenses, like home repairs, car repairs, or medical bills. And the best place to put that cash is a savings account. That way, you'll have access to it whenever you need, and you won't have to worry about your principal contribution losing value.
But while it's good to have a nice amount of financial protection from emergencies, you don't want to make the mistake of putting all of your money into a savings account. Even when interest rates are higher like they are today, they might pale in comparison to the returns you manage to generate by investing your money in a brokerage account.
Don't sell your money short
Putting your money into a savings account means keeping it safe. Investing, on the other hand, carries risk. But in exchange for that risk, you might manage to generate a much higher return on your cash than what a savings account will pay you. And in the long run, that could really make a difference.
These days, you might be able to score a 4% return on your money in a high-yield savings account. For a risk-free deposit, that's not a bad deal.
But here's something to consider. The S&P 500 index, which consists of the 500 largest publicly traded companies, generated an average yearly return of 11.88% between 1957 and the end of 2021, according to Investopedia.
Now, let's be a little bit more conservative than that and assume your portfolio only delivers an average yearly return of 8%. That's still a lot higher than the 4% you might get on the money you keep in a savings account. And that could make a world of a difference over time.
In fact, let's say you have $10,000 in cash beyond what you need for your emergency fund. If you keep that money in the bank for 30 years and score an average annual 4% return on it, you'll end up with around $32,400. But if you invest that $10,000 in a brokerage account and your portfolio delivers an average annual 8% return, in 30 years' time, you'll be sitting on about $100,600. That's a difference of more than $68,000.
It pays to take on some risk
Any money you have earmarked for emergencies, or for near-term goals, like buying a car or home, should be kept in a savings account. But if you have money you're trying to save for long-term goals, like retirement, then investing it could really be a far more lucrative choice.
And if you're not good at picking stocks or you feel you don't have the knowledge needed to do so, you can invest in exchange-traded funds instead. These allow you to put your money into the broad market so you're not taking on the risk that comes with buying individual companies. And it may make you more comfortable with the idea of investing in the first place.
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FAQs
Keeping too much cash in a savings account over time could mean losing out on higher returns in a brokerage account.
What happens when you leave money in a savings account? ›
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.
Is it bad to keep a lot of money in a savings account? ›
Keeping too much of your money in savings could mean missing out on the chance to earn higher returns elsewhere. It's also important to keep FDIC limits in mind.
What is the maximum amount of money you should keep in a savings account? ›
FDIC and NCUA insurance limits
This insurance protects your money if the financial institution you bank with goes out of business or otherwise can't afford to let you withdraw your money. So, regardless of any other factors, you generally shouldn't keep more than $250,000 in any insured deposit account.
Should I let money sit in my savings account? ›
The recommended amount of cash to keep in savings for emergencies is three to six months' worth of living expenses. If you have funds you won't need within the next five years, you may want to consider moving it out of savings and investing it.
Is 100k too much in savings? ›
Think That You're Done Saving
While reaching the $100,000 mark is an admirable achievement, it shouldn't be seen as an end game. Even a six-figure bank account likely won't go far enough in retirement, which could last as long as 30 years.
Is $20,000 in savings good? ›
Having $20,000 in a savings account is a good starting point if you want to create a sizable emergency fund. When the occasional rainy day comes along, you'll be financially prepared for it. Of course, $20,000 may only go so far if you find yourself in an extreme situation.
Should I keep $10,000 in savings? ›
First things first: There's nothing wrong with keeping $10,000 in a savings account. If you're working with a reputable bank, your money will have Federal Deposit Insurance Corporation (FDIC) insurance up to $250,000 per person per account ($500,000 for joint accounts). This protects your money even if the bank fails.
How much does the average person keep in savings? ›
In terms of savings accounts specifically, you'll likely find different estimates from different sources. The average American has $65,100 in savings — excluding retirement assets — according to Northwestern Mutual's 2023 Planning & Progress Study. That's a 5% increase over the $62,000 reported in 2022.
How long should you keep money in a savings account? ›
Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job. 2 Other experts say three months, while some say none at all if you have little debt, a lot of money saved in liquid investments, and good-quality insurance.
You can deposit as much as you need to, but your financial institution may be required to report your deposit to the federal government. That doesn't mean you're doing anything wrong—it just creates a paper trail that investigators can use if they suspect you're involved in any criminal activity.
Can I deposit 100k cash in the bank? ›
Financial institutions are required to report large deposits of over $10,000. However, if the bank reports your cash deposits before you do, you may end up with a fine or, worse yet, have your account frozen. There are also a few other situations that can put you on the IRS's radar.
How much cash can you keep at home legally in the US? ›
You can keep roughly $500 in your house before the police accuse you of having so much money an indicate it's a result of illegal activity. There is no legal limit.
What are 3 cons to using a savings account? ›
Among the disadvantages of savings accounts:
- Interest rates are variable, not fixed.
- Inflation might erode the value of your savings.
- Some financial institutions require a minimum balance to earn the highest interest rate.
- Some accounts might charge fees.
The best type of account is the one that fits your current financial goals and needs. Checking accounts can help you handle all of your daily spending and recurring bills, while savings accounts can help you build your savings, protect you from unexpected expenses and help meet your savings goals.
How much money do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
Can I leave my savings account empty? ›
Some banks have minimum balance requirements, meaning that if you withdraw all your money from the account, you'll no longer be able to keep it open.
Does your money grow in a savings account? ›
In savings accounts, interest can be compounded, either daily, monthly, or quarterly, and you earn interest on the interest earned up to that point. The more frequently interest is added to your balance, the faster your savings will grow.
