Savings Goals: Is Having Too Much Money in Your Bank a Problem?

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Believe it or not, there is such a thing as having too much money in the bank.

You often hear that no matter how much you earn, it's important to sock money away in a savings account. That way, you'll have cash reserves to fall back on in case an emergency strikes.

But how much money should you have on hand? It depends. As a general rule, it's good to have enough in cash reserves to cover at least three months of living expenses. And some people want more protection than that.

But about 54% of households with higher incomes have a median balance of $31,900 in a traditional savings account, according to a recent report by the Consumer Federation of America. Is that too much?

Striking a balance

Your goal in building an emergency fund is to have enough money to get through a period of unemployment or a major unplanned expense without being forced into debt. To find that amount, see how much you spend each month, and multiply the sum you spend on essential bills by at least three. Or, to put it another way, if your non-negotiable bills cost you $3,000 a month, aim for at least $9,000 in the bank -- and you may want up to $18,000.

There is, however, a danger in over-funding your emergency savings. If you keep too much in regular savings, you won't earn much of a return on your cash -- especially given where savings account rates are today.

That's why it's a good idea to max out your emergency fund in a savings account, but put other extra money into a brokerage account. That way, you gain the opportunity to grow it into a much larger sum.

But back to that median $31,900 savings balance. The truth is that it's impossible to say whether that's an appropriate savings balance for higher earners. Without knowing what the subjects of the aforementioned report spend each month, we can't know if $31,900 is too much money to have in savings, too little, or just the right amount.

It's conceivable that higher earners might spend $10,000 a month between expensive mortgage payments, car payments, and other essential bills like food and utilities. And in that case, having a little less than $32,000 in a traditional savings account is appropriate.

But is a balance of $31,900 too high for a household that only spends $4,000 a month on essential bills? Probably.

In the report, the authors surmise that one reason higher earners had that much money in savings was to give them quick and easy access to cash for emergencies. But other theories were that they hadn't closed older savings accounts, or they found it easier to automatically transfer funds into savings accounts than into investment accounts.

Either way, the amount of money you put into savings should be based not so much on your income, but rather, your essential expenses. While it's okay to keep a little more than what you need for emergencies in the bank, also look at putting your excess cash into a brokerage account. That way, you may benefit from investment gains that could far surpass what you'd collect in interest.

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