Putting more money in the bank at some point doesn’t make sense. We all need money to cover unexpected costs, like car repairs, home repairs, or medical bills. When it comes to money, your main goal should be to build up an emergency fund that has enough money for three to six months worth of living expenses.
It might be possible for you to keep putting money into your savings account even if you can’t put more than the amount above.
Is it good to keep putting money in the bank?
As long as you don’t let your savings account balance get too high, having a bigger emergency fund can be a good idea. If you do, you won’t get a better return on your money.
Why You Shouldn’t Save Your Money In A Bank
Everyone likes to see a big balance in their checking account. But how big is too big for them?
If you have too much money in your account, it’s not the best thing to do.
Here is the main reason;
It’s easy to make you want to spend it, so your money won’t grow there.
“No more than about two months’ worth of expenses” should be kept at any one time by any one who has a steady income, says financial planner Marci Bair of Bair Financial Planning in San Diego, California.
It’s bad to keep too much money in the bank.
As a result, you’re giving up money because you don’t give your savings a chance to grow. When you keep too much money in a savings account, that’s what happens.
Of course, the best thing about a savings account is that you can get your money at any time and that the money you put away is safe from being lost. As long as you don’t spend money, this isn’t the case.
In general, when you invest through a brokerage account, there’s a chance that your account balance will go down when the market goes down or when an investment doesn’t work out well for you. That’s why it’s not a good idea to keep your emergency fund in stocks. The market is too volatile to make that a safe bet, and if you need money when the market is down, you could lose a lot of money.
That said, once you’ve saved enough money to cover six months of living expenses, you shouldn’t keep depositing your extra money in the bank. Instead, you should invest that extra money so that it grows into a bigger sum of money.
Then, let’s say you spend $4,000 a month on living expenses and want a $24,000 emergency fund. Suppose you can save another $10,000 on top of that $24,000. If you put $10,000 into a high-yield savings account that pays 2% interest for 10 years, that money will grow into $12,190. That’s what happens if you leave it alone.
What happens if you put that money into something else instead? Historically, the stock market has made about 9% per year for the last 100 years. Let’s be a little more conservative and say that if you put that $10,000 into stocks and let it sit for 10 years, you’ll make about 7% per year instead. In that case, you’d have to make $19,672 instead of $12,190. That’s a big difference.
There is even more of a difference between a savings account and an investment account as time goes on.
Over 30 years, if you leave that $10,000 in a savings account that earns 2%, it will grow to $18,113. But if you put your money into a brokerage account that is mostly invested in stocks, that $10,000 could grow to $76,123 over 30 years, assuming a 7% average annual return. That would make you $58,000 richer.
Conclusion
Now, there may be times when it makes sense to save more than six months’ worth of living expenses in case of an emergency. To put nine to 12 months’ worth of expenses in the bank, for example, if your income varies and you often have low or no income.
But once you’re sure that your emergency fund is full, do yourself a favor and put the rest of your money into investments. If you don’t want to completely invest in stocks, build a portfolio that includes bonds, REITs, or other types of investments. You need to get a better rate of return than even the most generous savings account can give you.
People who have a lot of money in their savings account will be happy with their decisions. It’s important not to let that balance get so high that you miss out on wealth-building chances.
