The Unexpected Downside of Having Too Much Money in Your Savings Account

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The Federal Reserve reports that 37% of Americans don't have enough money in their savings accounts to cover a $400 expense that pops up out of the blue. So if you have considerably more money in savings than that, you're clearly in a better place.

But you also need to be careful not to overfund your savings account. Believe it or not, there's a serious downside to keeping too much money in savings.

When you go overboard

You might assume that the more money you have in your savings account, the better off you are. And to be clear, it's a great thing to have a generous emergency fund for unplanned expenses.

The general guidance is to aim for enough emergency savings to cover at least three months of essential bills -- such as rent, groceries, and utilities. But if you have enough cash to cover six months' worth, you're that much more protected.

But there is such a thing as having too much money in your savings account. If you have a lot of cash sitting there beyond what you need for your emergency fund, you risk shorting yourself on the higher returns you might get elsewhere.

These days, it's not too difficult to find a savings account with an APY in the 4% range. But that's not the norm. And it's not unheard of for savings accounts to pay as little as 0.01%.

The stock market, on the other hand, has averaged an annual 10% return over the past 50 years, accounting for good years and years when stocks underperformed. If you take some of the extra cash you have in your savings account and invest it in a brokerage account , you might end up with a lot more money after a long period.

In fact, let's say you have an extra $5,000 in your savings account. If you keep it there and earn a yearly 2% return, in 20 years, that $5,000 will be worth about $7,430.

But if you put that $5,000 into a stock portfolio that generates a yearly 10% return, then in 20 years, your $5,000 will be worth about $33,637. That's a huge difference.

Why settle for less?

It's better to have extra money in a savings account than too little. But once you're done saving for emergencies, know that putting your cash into stocks could pay you a lot more over time.

Now, you do need to make sure you're able to keep your money invested for many years before opening a brokerage account. If you cash out a stock portfolio too soon, you might do so at a time when it's down, thereby taking losses.

As a general rule, it's best to make sure you have a 10-year window or longer when putting money into the stock market. But if that's the case, know that you stand to gain quite a lot by pulling some extra cash out of savings and using it to buy stocks instead.

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