Many of us take the money we keep in the bank for granted. But as of 2022, a significant 37% of Americans couldn’t afford an unplanned expense of $400, according to the Federal Reserve. So if you’re worried about saving too much, that’s a very good situation.
At the same time, you don’t want to overfund your savings account. Because if you invest too much money, you may miss out on better returns elsewhere. It is important to strive for the right balance.
The best way to use a savings account
A savings account is a good place to store cash for short-term purchases. And you need to use that as a source of emergency funds.
To find out if you’re over-funding your savings account, you need to decide how much money you want to keep on hand for unexpected expenses. A general rule of thumb is to have enough cash on hand to cover at least three months’ worth of daily necessities. Beyond that, there is still room.
Recommendations for the Best High Yield Savings Accounts of 2024
Capital One 360 performance savings
AP
4.10%
Price Information A circle with the letter I written on it. Please visit the Capital One website for the latest pricing. Advertised Annual Percentage Yield (APY) is variable and accurate as of September 27, 2024. Rates may change at any time before or after account opening. Member of the FDIC.
AP
4.10%
Price Information A circle with the letter I written on it. Please visit the Capital One website for the latest pricing. Advertised Annual Percentage Yield (APY) is variable and accurate as of September 27, 2024. Rates may change at any time before or after account opening.
Minutes. earn
$0
American Express® High Yield Savings
AP
4.10%
Price Information A circle with the letter I written on it. As of October 4, 2024, the annualized yield is 4.10%. FDIC Member States.
AP
4.10%
Price Information A circle with the letter I written on it. Annual percentage yield as of October 4, 2024 is 4.10%
Minutes. earn
$0
Discover® Online Savings
Member of the FDIC.
Minutes. earn
$0
Depending on your comfort level, type of work, and expenses, you may decide that you need a six-month emergency fund. Or maybe you need more protection than that, and that’s perfectly fine.
Of course, if you maintain a larger emergency fund, you should try to get the highest possible return on that fund. Click here to see our list of the best high-yield savings accounts.
But if you have more money in your savings account than you need for your emergency fund or short-term expenses or goals, you may want to use the remaining cash to find a new home.
Invest your money so you can do more
In some cases, it’s worth giving up greater benefits for peace of mind. Emergency funds should never be invested. Loss of value may mean you won’t be able to cover the expenses you’re facing.
But for money you don’t have for emergencies, investing is the best option. That’s because the stock market is likely to give you much higher returns than a savings account in the long run.
Currently, interest rates on savings accounts are around 4% to 4.5%, but this rate is not standard. And interest rates are likely to fall as the Federal Reserve continues to lower its base rate.
But the S&P 500’s average annual return over the past 50 years has been 10%. Therefore, if you invest additional funds in similar index funds for years or decades, your portfolio is likely to perform similarly. For example, if you invest $5,000 today at a 10% annual return, you’ll have more than $54,000 in 25 years.
Now, you may be thinking: “That’s great, but how do I find the right stocks?”But don’t worry if you don’t know much about investing. Most brokerage accounts allow you to easily accumulate investments such as S&P 500 ETFs (exchange traded funds), essentially allowing non-experts to invest in a wide range of stock markets.
Check out our list of the best online brokerage accounts and put your extra funds to work.
