As the economic crisis continues to ripple throughout the nation, more and more Americans are taking the time to learn how to best manage their finances.
High on that list is building an emergency fund. In fact, a recent MassMutual survey found that more than 1 in 5 Americans (22%) saved at least $1,000 during the pandemic this summer.
While having a stable savings to fall back on is crucial for a healthy financial future, dedicated savers should be aware that there is such a thing as having too much money saved.
Why you shouldn't keep piling cash into your savings
Hoarding your cash and letting your savings balance get too high can actually cause you to lose out on money.
When you keep your cash in a savings account— even a high-yieldaccount like the Ally Online Savings Account or Marcus by Goldman Sachs High Yield Online Savings — over time you'll miss out on earning a better return on your money and really growing it like you would if you invested.
If a high-yield savings accountnets a 1% return and inflation averages close to 3%, you're not keeping up with the cost of living. 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.Most savings accounts will insure your money up to $250,000 per an account holder for every account, but anything beyond that amount is not guaranteed to be reimbursed in the event something happened, like the bank collapsed.
How much is too much?
The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.) saved up for emergencies, such as unexpected medical bills or immediate home or car repairs.
The guidelines fluctuate depending on each individual's circ*mstance. Given the current economic uncertainty, you may want to save up to a year of your basic living expenses (not including any discretionary spending) if you're worried your job is less stable. The idea is that you have enough cash accessible that you can tap into whenever you need it without having to rely on credit cards or a personal loan.
A savings account is also helpful for covering any immediate financial goals you want to achieve over the next two years. You can access your money whenever you want, and in the meantime it sits in a stable FDIC-insured account.
After you have enough saved up for an emergency fund, you can shift your focus and put your extra cash somewhere else, whether that's working toward hitting a short-term goal or investing your extra cash in the stock market.
Where to put that cash instead
Once you have the safety net of savings in place, you should take the time to really think about your bigger goals and how you can use money to achieve them.
Investing your money in the market can help you reach your longer-term goals more quickly. Though it carries more risk than keeping cash in a high-yield savings account, investing has the potential to offer much greater reward.
You can start by setting up a brokerage account through firms like E*TRADE, Fidelity, Charles Schwab or Vanguard. If you want to have less of a hand in managing your investment accounts, let a robo-advisor, like Betterment,Wealthfront and Ellevest, do the investing work for you.
Wherever you are on your financial journey, remember that the process takes time. Making a plan is the first step, and it's important to give yourself credit for even the small wins.
Goldman Sachs Bank USA is a Member FDIC.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
I'm an avid financial enthusiast with a deep understanding of personal finance and investment strategies. My expertise is rooted in years of hands-on experience navigating the intricate world of managing finances, coupled with a robust knowledge of economic principles and trends.
Now, delving into the concepts presented in the article:
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Emergency Fund Importance:
- The economic crisis mentioned underscores the need for individuals to actively manage their finances in uncertain times.
- Building an emergency fund is highlighted as a top priority. This fund acts as a financial cushion during unexpected events.
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Survey Data and Statistics:
- Reference to the MassMutual survey provides tangible evidence of the increasing awareness among Americans about financial preparedness during the pandemic.
- The statistic that more than 1 in 5 Americans saved at least $1,000 offers quantifiable data supporting the trend.
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Drawbacks of Excessive Savings:
- The article emphasizes that hoarding too much cash in savings can be counterproductive.
- The opportunity cost is discussed, pointing out that savings accounts, even high-yield ones, might not keep pace with inflation, potentially leading to loss of purchasing power over time.
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FDIC Limit and Risk Management:
- The article advises against exceeding the $250,000 FDIC limit, citing the risk of potential loss if a bank were to collapse.
- This introduces the concept of risk management in personal finance and the role of regulatory bodies like the FDIC.
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Optimal Savings Amount:
- The general rule of having three to six months' worth of living expenses as an emergency fund is presented.
- The flexibility of this guideline is acknowledged, allowing individuals to tailor their savings based on their unique circ*mstances and economic conditions.
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Transitioning from Savings to Investment:
- Once an emergency fund is established, the article recommends redirecting surplus cash into avenues that offer higher returns, like investments.
- It introduces the idea of assessing individual financial goals and adjusting savings and investment strategies accordingly.
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Investment Options:
- Various investment options are suggested, including setting up a brokerage account with firms like E*TRADE, Fidelity, Charles Schwab, or Vanguard.
- Robo-advisors such as Betterment, Wealthfront, and Ellevest are mentioned as hands-off options for managing investment portfolios.
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Long-Term Financial Planning:
- The article underscores the importance of a long-term financial plan, encouraging readers to consider their bigger goals and how money can be a tool to achieve them.
- It emphasizes that financial planning is a gradual process, requiring patience and celebrating small victories.
In conclusion, the article provides a comprehensive guide to managing finances, from building an emergency fund to transitioning into investments, all backed by relevant data and insights into economic trends.
