The health of your savings account can be one of the most critical aspects of your entire financial portfolio. Besides making it possible to retire eventually, the stockpile of funds can help you weather an unexpected income shortage, unforeseen health issues, or any other emergencies that might require extra cash. But while no one wants to see their reserves do anything but grow over time, there is a point at which you might want to consider moving some of your money around. Read on for the signs that mean you may have too much money in your savings account, according to experts.
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1 | You've stashed away a sizable amount of cash.
ShutterstockThanks to regulations and government programs, most people can stash their funds in a bank without worrying they'll be lost if their financial institution goes belly up. But experts say it's important to note that if you've been lucky enough to store away a significant amount of money, there's a limit to how much could be protected in the event of an emergency.
"The FDIC [Federal Deposit Insurance Corporation] insures all deposits at U.S. banks up to $250,000 per depositor," says Robert Farrington, founder and CEO of The College Investor. "This means you shouldn't keep more than $250,000 in an account if you're single or $500,000 if it's a joint account. They track this by Social Security number, so this limit is combined across checking, savings, and CDs [certificate of deposit accounts]."
2 | You're tucking away too much of your net worth.
ShutterstockBecause everyone's financial situation is different, there's no exact figure of how much someone should aim to have in their savings account at any given time. However, you can still determine how much is enough to have on hand by determining your net worth and calculating what's right for you.
"For most people, having between 10 to 20 percent of your net worth in a savings account should suffice. If possible, try not to exceed 25 percent," Harry Turner, financial expert and founder of The Sovereign Investor, tells Best Life. "This means that if you have a net worth of $20,000, you should try not to keep more than $2,000 to $4,000 in your savings accounts. The rest can go into other things like equity investments where return expectations are higher."
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3 | You've put too much away for basic expenses.
iStockEven though our budgets should help us stay on top of regular expenses, savings accounts can act as a lifeline in situations when funds in your checking account run short. But while it's essential to prepare for any emergencies, there's an upper limit to how much you'll need on hand.
"As a general rule of thumb, most experts recommend having at least three to six months of living expenses in an emergency fund," says Turner. "Therefore, when considering how much is 'too much' beyond this amount, I would say anything between two to three years' worth of living expenses in a savings account is excessive for most people. Otherwise, you could be missing out on higher returns in alternative investments, like equities."
However, this may not apply to all phases of life. "Of course, as you get older and closer to retirement or if you are saving towards another short-term goal, you will want to reduce your exposure to riskier investments and hold a larger percentage of your wealth in a savings account," Turner adds.
4 | You're operating a cash-flush business.
iStock / AsiaVisionMany rely on their salaries to help fill their savings and checking accounts over time. But if you're an entrepreneur or self-employed with a successful business, there's a good chance you'll have much more cash on hand than someone on payroll. And according to experts, this presents its own set of risks.
"Like consumers, businesses are only insured up to $250,000 per EIN [Employer Identification Number] by the FDIC," explains Farrington. "The big issue with business-oriented banks is that it's really easy for a small or medium-sized business to go past the $250,000 mark because things like monthly payroll, paying the rent, and paying vendors could all require having plenty of cash at any given time. And it's not just large operations: This can be an exceptionally hard problem for mom-and-pop businesses."
However, there are now ways to mitigate some of this risk. "There are new online bank accounts today that can aggregate your deposits automatically across multiple banks so that you can be insured at all times," Farrington adds.
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.
