Many people live paycheck to paycheck and have no money in a savings account to fall back on. And that, frankly, is far from an optimal way to live.
If you don't have some cash reserves in the form of an emergency fund, you might instantly land in debt when an unexpected bill arrives. Similarly, if you were to lose your job, you'd likely end up with costly debt in the absence of savings.
That's why it's important to have an emergency fund with enough cash to cover anywhere from three months to a year's worth of essential expenses. That's a pretty big range, and you'll need to assess your personal circ*mstances to decide which end to aim for.
If you're single with minimal expenses, you may be okay with a three-month emergency fund. If you're a single parent with a mortgage and three kids, you may want to aim for a 12-month emergency fund, as that could give you the protection and peace of mind you need.
Our Picks for the Best High-Yield Savings Accounts of 2024
Capital One 360 Performance Savings APY 4.25% Rate infoSee Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY)is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings OnCapital One'sSecure Website. Member FDIC. | APY 4.25% Rate infoSee Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY)is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. | Min. to earn $0 |
CIT Platinum Savings APY 4.85% APY for balances of $5,000 or more Rate info4.85% APY for balances of $5,000 or more; otherwise, 0.25% APY Min. to earn $100 to open account, $5,000 for max APY Open Account for CIT Platinum Savings OnCIT'sSecure Website. Member FDIC. | APY 4.85% APY for balances of $5,000 or more Rate info4.85% APY for balances of $5,000 or more; otherwise, 0.25% APY | Min. to earn $100 to open account, $5,000 for max APY |
American Express® High Yield Savings APY 4.25% Rate info4.25% annual percentage yield as of September 15, 2024 Min. to earn $0 Open Account for American Express® High Yield Savings OnAmerican Express'sSecure Website. Member FDIC. | APY 4.25% Rate info4.25% annual percentage yield as of September 15, 2024 | Min. to earn $0 |
Meanwhile, a recent CNBC survey asked respondents how much liquid savings they feel they need to be financially comfortable. And for 27%, the answer was $100,000 to $249,000. But for many people, that's going overboard.
You don't want to keep too much money in cash
You might think it's a good thing to load your savings account with extra money. But let's say you're aiming for a six-month emergency fund and you spend $5,000 a month on essentials. That means you need $30,000 in the bank.
Now granted, you might spend more than $5,000 a month if you live in a high-cost area. The point, however, is that the typical consumer generally does not need a $100,000 to $249,000 emergency fund. And if you keep that much money in the bank, you might lose out financially.
Right now, it happens to be that savings accounts are paying generously -- upward of 4% in many cases. But there was a time not so long ago when you'd be lucky if you even got 1% back on your money.
By contrast, over the past 50 years, the stock market has delivered an average annual 10% return, as measured by the S&P 500. So even with savings accounts paying so generously, you might still lose out financially by keeping too much money in cash.
Let's say you really only need a $30,000 emergency fund, but you maintain a $100,000 balance instead. That's an extra $70,000 in cash.
Let's also go with today's savings account rates and assume you'll earn 4% on that $70,000 over the next 10 years. If so, you'll be looking at around $104,000. But if you put that money into the stock market and score a 10% annual return instead, in a decade's time, you could be looking at almost $182,000. That's a $78,000 difference!
Don't overfund your emergency savings
You may be inclined to take the attitude that it's better to have more savings than less. And that's spot-on. It's far better to err on the side of overfunding your emergency savings than to not have enough cash to bail you out of a jam.
But unless you're an ultra-high earner with large monthly expenses, you probably don't need $100,000 to $249,000 in savings. A smaller balance could still provide the comfort and protection you need without forcing you to forgo more lucrative returns.