Here's What Happens When You Keep Too Much Money in a Savings Account

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Recent data from the Federal Reserve finds that 37% of Americans could not cover an unplanned $400 expense. So if you have a large pile of cash in your savings account , you're clearly in much better shape than those who couldn't come up with $400 on the spot.

But while it's better to have a large savings account balance than one that's too small, there is such a thing as having too much cash in savings. And it's important to recognize whether you're in that situation.

The problem with keeping too much money in savings

The nice thing about savings accounts is that they're a safe place to stash your money. As long as you choose a bank that's FDIC-insured, your money is protected up to $250,000 per depositor, per FDIC-insured bank, per ownership category. It doesn't matter if your bank fails or what market conditions look like -- you can't lose a dime of your deposit.

But with a savings account, you may not earn all that much interest on your money. It's true that many savings accounts are paying 4% or more right now. But today's rates are not typical for savings accounts.

You may find that in a few years, the best you can get out of your savings account is 1% or 2% on your money. And at that pace, it could take a really long time for your money to grow.

That's why it's important not to overfund your savings. If you keep too much cash in the bank rather than invest it , you could lose out on serious returns.

Over the past 50 years, the stock market's average annual return has been 10%, accounting for both good years and bad. If you were to keep an extra $10,000 in a savings account paying 2% a year over 20 years, you'd end up with about $15,000. In a stock portfolio paying 10%, in 20 years, you'd end up with a little more than $67,000. So in this example, sticking to a savings account could cost you $52,000.

How much savings should you have?

As a general rule, it's smart to have enough emergency savings to cover three to six months of essential bills. This way, if you were to lose your job or run into a major issue with your home, car, or health, you'd have a way to avoid costly debt.

It's also okay to keep money in your savings account beyond your emergency fund. If you're trying to buy a home in a year, a savings account is the best place for your down payment.

But money you don't need for emergencies or near-term goals is money you should strongly consider investing. Keeping too much money in your savings means stunting its growth and making it harder to achieve long-term goals, like setting yourself up for a comfortable retirement.

And if you're worried about the risks associated with investing, just remember that the stock market has tanked plenty of times over the past 50 years, yet investors have still enjoyed an average annual return of 10%. That should tell you that if you invest in stocks for the long haul, there's a good chance you'll come out a winner, too.

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