If you have a large amount of money in a savings account and your emergency fund is well stocked, that’s a good thing. Life is full of surprises, and the more padding you have to cushion your financial falls, the better. However, don’t let that savings account get too big.
When you keep too much money in your savings account, you’re missing out on a chance to see that cash truly grow. That’s done through investing. Sure, there are downsides to the stock market. For one, if you have most of your savings in investments, you can’t readily access them. Also, if you should need that money during a market downturn, you’ll likely end up staring at big losses. This is why your emergency fund should always be in a savings account. You’ll be able to access it and it won’t suffer from the fluctuations of the market. Yet once that emergency fund is packed with at least six months of living expenses, you should start investing the rest of your savings.
Consider the following example that USA Today laid out. Let’s say you keep $10,000 in a savings account with a 2 percent interest rate (among the best rates available). If you leave those savings alone for 10 years, you’ll have $12,190. Not bad. Until you realize that the stock market’s historical interest rate average is about nine percent. Accounting for downturns, let’s say you invest that $10,000 and get just a seven percent return over those same 10 years. At the end of the decade, instead of $12,190, you’d have $19,672. That’s much better. And a solid reminder to invest your savings once you have a solid foundation built.