How Much Cash Should I Keep In The Bank?

Saving money and putting personal finance tips into practice can be challenging. Tucking away money for an emergency fund, much less a down payment on a house, retirement, or a child’s college tuition, can take years of steady saving and a huge amount of discipline. Of course, barring catastrophe, once you establish those emergency savings and develop positive spending and saving habits, staying on top of your finances gets a whole lot easier.

Once you’re no longer living paycheck to paycheck and have money tucked away to cover a medical emergency, a job loss, or a vacation, you’ve reached a state of financial stability—but that doesn’t mean you can just stop thinking about where your money is going. Turns out, it is possible to keep too much money in the bank, and tucking all of your savings there can actually hurt your long-term financial goals.

That’s not to say you shouldn’t keep any money in the bank. Liquid savings, money that is easily accessible without incurring a fee, should the need arise, is necessary for well-balanced financial health.

For most people, those savings take the form of an emergency fund. “When thinking about your overall savings, one should consider an emergency fund as a part of the mix,” says Shirley Yang, vice president of Marcus by Goldman Sachs.

Where Should I Keep My Emergency Fund?

Yang says most financial experts agree that your emergency savings should include six months’ worth of living expenses, but the actual number depends on your financial stability. Lauren Anastasio, a certified financial planner at SoFi, says three to six months’ worth of expenses is a good rule of thumb. If you work in a stable industry, are in good health, and live in an area with a low cost of living, you may be able to get away with putting less money—only three months of expenses—in your emergency fund; if there’s a chance that large expenses (or layoffs) may pop up in your future, socking away more money may be smarter.

“This money should be kept separate from your regular checking account to avoid accidental spending or the temptation to use funds for anything other than an emergency,” Anastasio says.

Keeping those savings in a bank account (instead of an investment account) means you can access them when you need to, but it also means you have a lot of money sitting in one place, depreciating with interest. To keep the value of your emergency fund high, keep it in a high-yield savings account; interest rates have plummeted during the coronavirus pandemic and economic crisis, but chances are that the 2 percent rates we enjoyed in 2019 will return at some point.

In the meantime, if you’re looking for a place to keep your cash savings, research current rates and pick a bank with the highest possible rate. As the economy improves, interest rates will likely rise again. Remember that most online banks offer higher interest rates than their brick-and-mortar peers, put your money somewhere reliable, and settle in for a long wait.