It's important to have cash reserves available, but $100,000 may be overdoing it.
It's important to have money available in your savings account to cover unforeseen expenses. Plus, you never know when you might lose your job or see your hours (and income) get cut, so having cash reserves at the ready is important.
But some people may be taking the idea of an emergency fund to an extreme. In fact, a good 51% of Americans say $100,000 is the savings amount needed to be financially healthy, according to the 2022 Personal Capital Wealth and Wellness Index. But that's a lot of money to keep locked away in savings. In fact, if you're really sitting on that much cash, there may be a better place to keep some of it than the bank.
How much emergency savings do you need?
Ideally, you should have enough money in an emergency fund to cover three to six months of essential living costs. In some cases, you may want to aim a touch higher, such as if you're the sole breadwinner in a household with many dependents but you're also self-employed and are therefore generally not entitled to unemployment benefits in the event of job loss.
Now if you happen to spend $20,000 a month, then sure, $100,000 is a reasonable amount to put in your emergency fund. But most of us don't spend that much on a monthly basis -- not even close. Chances are, you can sock away a lot less money in savings and still reach a place where you can consider yourself financially healthy.
The danger of keeping too much money in cash
While erring on the side of overfunding your emergency savings might seem like a good idea, the reality is keeping too much money in the bank could backfire on you. That's because savings accounts, generally speaking, don't pay much in interest. Granted, right now, savings account interest rates are at an extreme low, but even in a more generous interest rate environment, you'll limit the extent to which your money can grow if you keep too much of it in savings.
If you have money you don't need for your emergency fund and that you don't expect to use within the next five years, a good bet is to put it into a brokerage account and invest it. While investing carries the risk of losing money, you might also manage to grow your money into a much larger sum than what a savings account will allow for.
Let's say you typically spend $4,000 a month and want six months' worth of bills in your emergency fund. Let's also assume you've managed to save $40,000 (in which case, great job). Your first $24,000 should absolutely go into the bank. But you might then want to take your remaining $16,000 and invest it in stocks or other assets that could help generate larger returns than what your savings account will pay you. This assumes, of course, you don't need that $16,000 for a down payment for a home or something similar in the near term.
Don't go overboard on savings
You'd think that having as much savings as possible would be a good thing. But actually, there is such a thing as having too much money in the bank.
Also, while it's not a bad thing to aim to amass $100,000 between savings and other assets, you also don't absolutely need to hit that target to be considered financially healthy. If you have a full emergency fund and are steadily working toward other goals, like building a nest egg for retirement, then there's no need to get down on yourself if you haven't reached the $100,000 mark. A better bet is to track your own progress and be proud of the strides you're able to make given your personal financial circ*mstances.
Alert: highest cash back card we've seen now has 0% intro APR until 2025
If you're using thewrong credit or debit card, it could be costing you serious money.Our experts love this top pick,which featuresa0% intro APRfor 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
As a seasoned financial expert with a deep understanding of personal finance and investment strategies, I can confidently provide insights into the concepts discussed in the article. My expertise is rooted in a comprehensive knowledge of economic principles, investment vehicles, and wealth management strategies.
The article discusses the importance of maintaining cash reserves for unforeseen expenses and the potential pitfalls of overdoing it, particularly with a significant sum like $100,000. The 2022 Personal Capital Wealth and Wellness Index is cited to emphasize that 51% of Americans view this amount as necessary for financial health.
The key concept introduced is the ideal emergency fund size, suggesting that individuals should aim to cover three to six months of essential living costs. It also acknowledges the variability in this recommendation, such as a potential need for a higher amount if one is the sole breadwinner in a household with many dependents and lacks eligibility for unemployment benefits.
Furthermore, the article cautions against keeping excessive money in cash due to the limited interest earnings in savings accounts. Even in a more favorable interest rate environment, the article suggests that stashing too much in savings can hinder potential growth. It introduces the idea of utilizing a brokerage account to invest surplus funds, highlighting the risk of potential losses but emphasizing the opportunity for higher returns compared to traditional savings accounts.
The narrative includes a practical example, illustrating that if one typically spends $4,000 a month and aims for a six-month emergency fund with $40,000 in savings, the excess $16,000 could be invested for potential growth, provided there are no imminent needs for that money.
A noteworthy point is made about the misconception that having as much savings as possible is always beneficial. The article contends that there is such a thing as having too much money in the bank, and it encourages individuals to strike a balance between savings and other financial goals. The $100,000 target is presented as aspirational rather than mandatory, emphasizing the importance of tracking personal progress and celebrating achievements based on individual financial circ*mstances.
In conclusion, the article offers a comprehensive perspective on emergency funds, savings, and investment strategies, providing practical advice for individuals to optimize their financial well-being.
