While “save more, spend less” may be the rallying cry of personal finance experts, there’s a footnote that’s too often missed.
Saving money is important — and could be easier than it sounds — but if you’re saving too much, you may be keeping yourself from building wealth.
“Sometimes I see people with too much in savings and a lot of times that’s because they started making good money, and they are being responsible with it, but they don’t know what to do next,” Katie Brewer, a Dallas-based CFP and founder of Your Richest Life, told Business Insider.
Though you’re “never going to kill your financial future” by accumulating money, Brewer says, “you’re losing out on opportunity costs by having money sitting around … especially if it’s sitting in an account making barely anything in interest.”
The general rule of thumb, according to Mary Beth Storjohann, a certified financial planner and the founder of Workable Wealth, is to cap your personal savings once you have enough to cover at least six months worth of expenses, otherwise referred to as an emergency fund.
“You’ll hear between six and 12 months, but if you’re hoarding cash, then you want to make sure you’re taking action on it because you’re just losing out on interest and investment growth,” Storjohann said.
Indeed, compound interest — which is basically the snowball effect applied to your money — is incredibly valuable. By allowing your emergency fund to overflow beyond what’s necessary, you’re missing out on investment growth.
Both Storjohann and Brewer say you should be investing your extra savings someplace that will give you a return, like your 401(k) or IRA retirement fund, or even the stock market.
If you’re risk averse, one way to manage savings overflow is to move your money into a high-yield savings account, where you could be earning 1% interest on your money, rather than the 0.01% earned in a traditional savings account.
Another great option is to put your savings in a low-cost target date fund, a diversified retirement account that invests your money into a combination of stocks, bonds, and alternative assets. Though the market is impossible to predict, you’re still going to get a better return on the money here than you would in a plain old savings account, with little to no work required.
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