How much is too much in savings account?

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Wilhou2015
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How much is too much in savings account?

Post by Wilhou2015 » Wed Nov 07, 2018 9:58 pm

Hello everyone,

To give a little bit of background, I am very new to investing of any sort, but eager to learn.

I am 25 and saving about $2,000-$2,500 per month right now. I have a Roth IRA through Vanguard (VFIFX), which is maxed out. I plan to max out my 401k match once I’m eligible to in 2019. As of right now, beyond my Roth IRA, all of my money saved is going straight to a savings account.

My question is - how much is too much to be sitting in a savings account? Could I reallocate my savings in a better way that could be earning money?

Would love to hear from many of you. Thanks in advance.

mhalley
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Re: How much is too much in savings account?

Post by mhalley » Wed Nov 07, 2018 10:18 pm

A general rule of thumb is to have 3 to 6 months of expenses in an emergency fund such as a saving account. After that, what you do with the money depends on the goal. Money that is to be used within 5 years should be saved, not invested. Money for use in greater than five years can be invested.

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Watty
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Re: How much is too much in savings account?

Post by Watty » Wed Nov 07, 2018 10:28 pm

I would suspect that the money might eventually be used for things like buying a car, a house downpayment, a vacation, moving to a new apartment, etc.

If that is the case then a savings account is fine, but you should find one that pays a reasonable amount of interest, some of the local banks pay next to nothing.

longleaf
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Re: How much is too much in savings account?

Post by longleaf » Wed Nov 07, 2018 10:29 pm

I believe that any time frame under ten years should not be invested in stocks. With that said, establish an emergency fund in money market, savings, etc. from 6-12months of spending. Money saved beyond this should be invested according to your asset allocation, and in your case, in a taxable account. If you are saving for a large purchase soon, account for it.

Someone spending 10k/mo will have a different need of an emergency fund than one spending 5k/mo. It is a personal decision, of course. Remember that job loss and stock market declines can coincide.
Frugality, indexing, time.

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whodidntante
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Re: How much is too much in savings account?

Post by whodidntante » Wed Nov 07, 2018 11:18 pm

I am currently not taking a paycheck so I can hit the 415 limit of 55 grand. I don't have cash over the amount required to cover bills that are due and payable. I only have equity index ETFs in taxable accounts. I sell investments in a tax efficient way when I need money, then I trade in tax defered to restore my desired asset allocation. All of my money is in the capital markets. My savings account has $30 in it.

2015
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Re: How much is too much in savings account?

Post by 2015 » Thu Nov 08, 2018 12:05 am

Watty wrote:
Wed Nov 07, 2018 10:28 pm
I would suspect that the money might eventually be used for things like buying a car, a house downpayment, a vacation, moving to a new apartment, etc.

If that is the case then a savings account is fine, but you should find one that pays a reasonable amount of interest, some of the local banks pay next to nothing.
OP, welcome to the forum! You didn't state what your goals are for your savings. Are they for the things Watty mentioned? If they are, I agree with Watty's advice. OTOH, if some portion of the savings is for retirement you might say so in order to get more in depth advice.

inbox788
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Re: How much is too much in savings account?

Post by inbox788 » Thu Nov 08, 2018 12:37 am

longleaf wrote:
Wed Nov 07, 2018 10:29 pm
I believe that any time frame under ten years should not be invested in stocks. With that said, establish an emergency fund in money market, savings, etc. from 6-12months of spending. Money saved beyond this should be invested according to your asset allocation, and in your case, in a taxable account. If you are saving for a large purchase soon, account for it.

Someone spending 10k/mo will have a different need of an emergency fund than one spending 5k/mo. It is a personal decision, of course. Remember that job loss and stock market declines can coincide.
When interest rates were close to zero and bonds yields were very low, it didn't matter all that much where you saved your cash. One consequence of rising rates is that I'm moving more cash type funds into VMMXX/VMFXX and short term bonds. While they're not no risk propositions like savings/CDs, their risk is very low and returns potentially higher and self-adjusting (with luck, upward). I'd consider these for money to be spent on auto or home purchases as well as stockpiling as you decide how to invest.

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Nissanzx1
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Re: How much is too much in savings account?

Post by Nissanzx1 » Thu Nov 08, 2018 2:44 am

Lots of factors and some great answers. We run several online savings accounts with FDIC protection. We love it. 1.8%. We have accounts for nearly every contingency ranging from $200 to 10's of thousands.

You can't really have too much as long as it goes toward one of your financial goals/ priorities.

Wilhou2015
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Re: How much is too much in savings account?

Post by Wilhou2015 » Thu Nov 08, 2018 8:15 am

2015 wrote:
Thu Nov 08, 2018 12:05 am
Watty wrote:
Wed Nov 07, 2018 10:28 pm
I would suspect that the money might eventually be used for things like buying a car, a house downpayment, a vacation, moving to a new apartment, etc.

If that is the case then a savings account is fine, but you should find one that pays a reasonable amount of interest, some of the local banks pay next to nothing.
OP, welcome to the forum! You didn't state what your goals are for your savings. Are they for the things Watty mentioned? If they are, I agree with Watty's advice. OTOH, if some portion of the savings is for retirement you might say so in order to get more in depth advice.
Sorry, my savings goals are - In 2-5 years I will probably buy a used car (have a company car right now, but won’t always have it), and buy a house. I also could have a period of 6-9 months with no job depending on how things play out for me in 2020. I am on a 2.5 year contract right now. So, that emergency fund of 6 months is a very real thing for me. Beyond that 2-5 years and after those goals have been achieved of buying a house and car, I plan to save primarily for retirement. With all of the responses I’ve gotten, I’m hearing that I should continue saving (probably savings account) based on my needs in the next 5 years.

RickBoglehead
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Re: How much is too much in savings account?

Post by RickBoglehead » Thu Nov 08, 2018 8:34 am

At your age, you should maintain 6 months of expenses at the max return you can safely get, which is likely Vanguard Prime Money Market.

You should consider investing the rest in an AA appropriate for your age. I can't imagine a 25 year old not investing money that is going to be used in the next ten years...

You could do a CD ladder for 19 - 60 months, then invest the rest. CDs can be purchased via Vanguard or Fidelity, which helps you keep things consolidated.

CurlyDave
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Re: How much is too much in savings account?

Post by CurlyDave » Thu Nov 08, 2018 10:14 am

I am not a great believer in the conventional wisdom that "money needed in the next 5, or whatever number you choose, years should be in a savings account or at least bonds."

Certainly your EF should be in a savings account, because there may be "hard" requirements for that money.

OTOH, many other longer term savings goals are really "soft" requirements. If I am saving for a house or a car (or put in some other goal) in say 5 years, that is really a soft goal. If I can't buy the house or car for 6 years instead of 5 it is going to be an inconvenience, not a huge financial setback.

Most of the time, stocks outperform the returns on savings accounts, and by a substantial margin. So I like to put the odds in my favor by placing that money in the market. We are retired now, but when we were in the accumulation phase, everything but about 3 months worth of expenses was in equities in a taxable account.

This strategy worked out well for us. Sure there were times when we postponed a car purchase when the market was down, but no big deal. And, that was our choice, because we had more than enough in the account to cover the expenditure -- we just didn't want to to sell at a market low. Over the length of a working career our savings used this way gave us a lot better returns than a simple savings account. Of course when we made an offer on real estate we moved money from stocks to checking to escrow account, because the requirement now had a very short time deadline. Same for any major purchase.

Our EF was about 3 months expenses. But we also had the taxable brokerage account we could tap in a real emergency.

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Taj_Mahalo
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Re: How much is too much in savings account?

Post by Taj_Mahalo » Thu Nov 08, 2018 11:52 am

Welcome. Like others have stated, keep a minimum of 6 months of living expenses aside in cash reserves.

For investing, start by maximizing your tax-free spaces if possible. Looking ahead to 2019, to could do something like this:
401k - $19,000
Roth IRA - $5,500
HSA (*if available) - $3,500

If you still have money leftover to save, then maybe look at starting a taxable account.
Income is not wealth. Wealth is not income. Both are equally as important and either is capable of producing the other.

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ruralavalon
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Re: How much is too much in savings account?

Post by ruralavalon » Thu Nov 08, 2018 11:59 am

Welcome to the forum :) .

It's good to see that you are contributing the maximum to your Roth IRA, are using a very diversified, low expense Vanguard fund, and will be starting your 401k next year. You are off to a good start.

Wilhou2015 wrote:
Wed Nov 07, 2018 9:58 pm
Hello everyone,

To give a little bit of background, I am very new to investing of any sort, but eager to learn.

I am 25 and saving about $2,000-$2,500 per month right now. I have a Roth IRA through Vanguard (VFIFX), which is maxed out. I plan to max out my 401k match once I’m eligible to in 2019. As of right now, beyond my Roth IRA, all of my money saved is going straight to a savings account.

My question is - how much is too much to be sitting in a savings account? Could I reallocate my savings in a better way that could be earning money? [emphasis added].

Would love to hear from many of you. Thanks in advance.
Wilhou2015 wrote:
Thu Nov 08, 2018 8:15 am
2015 wrote:
Thu Nov 08, 2018 12:05 am
Watty wrote:
Wed Nov 07, 2018 10:28 pm
I would suspect that the money might eventually be used for things like buying a car, a house downpayment, a vacation, moving to a new apartment, etc.

If that is the case then a savings account is fine, but you should find one that pays a reasonable amount of interest, some of the local banks pay next to nothing.
OP, welcome to the forum! You didn't state what your goals are for your savings. Are they for the things Watty mentioned? If they are, I agree with Watty's advice. OTOH, if some portion of the savings is for retirement you might say so in order to get more in depth advice.
Sorry, my savings goals are - In 2-5 years I will probably buy a used car (have a company car right now, but won’t always have it), and buy a house. I also could have a period of 6-9 months with no job depending on how things play out for me in 2020. I am on a 2.5 year contract right now. So, that emergency fund of 6 months is a very real thing for me [emphasis added]. Beyond that 2-5 years and after those goals have been achieved of buying a house and car, I plan to save primarily for retirement. With all of the responses I’ve gotten, I’m hearing that I should continue saving (probably savings account) based on my needs in the next 5 years.
Be sure to get a good rate on your savings for the (1) emergency fund, (2) car, and (3) home down payment. Use a federally insured savings account or short-term CDs, for rates see www.bankrate.com. Other possibilities are Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.22%, Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.59%, and a Vanguard short-term bond fund.

For any money in excess of those three goals use a taxable brokerage account at a low cost provider like Vanguard or Fidelity. Invest in very tax-efficient stock index funds. Examples would include Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Whocares1000
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Re: How much is too much in savings account?

Post by Whocares1000 » Thu Nov 08, 2018 12:41 pm

First off, never have more than the FDIC limit in any one bank in aggregate accounts. The lower interest rate you receive from regular bank accounts is offset by the safety of the FDIC insurance so you want to make sure you are not exceeding that.

That said, you need a decent emergency fund depending on your circumstances. If you think you might be out of work for 9 months, you might want a 9 - 12 month emergency fund rather than 6 months. After that, short term savings such as another vehicle or a down payment on a home should be in savings unless you plan to wait more than 5 - 10 years for those purchases.

Above all that, max out any retirement accounts and then from there, invest is low fee tax efficient mutual funds.

lotusflower
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Re: How much is too much in savings account?

Post by lotusflower » Fri Nov 09, 2018 12:11 pm

CurlyDave wrote:
Thu Nov 08, 2018 10:14 am
I am not a great believer in the conventional wisdom that "money needed in the next 5, or whatever number you choose, years should be in a savings account or at least bonds."

Certainly your EF should be in a savings account, because there may be "hard" requirements for that money.

OTOH, many other longer term savings goals are really "soft" requirements. If I am saving for a house or a car (or put in some other goal) in say 5 years, that is really a soft goal. If I can't buy the house or car for 6 years instead of 5 it is going to be an inconvenience, not a huge financial setback.
+1

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John151
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Re: How much is too much in savings account?

Post by John151 » Fri Nov 09, 2018 2:36 pm

I like to keep five percent of my investments in cash, defined as a savings account, a money market fund, or short term CD’s. That’s my emergency fund, and it also serves as ballast when stocks and bonds decline. With today’s rising interest rates, bond funds can drop in value, but cash doesn’t drop, and as interest rates rise, the return on cash goes up.

Of course, cash can lose ground to inflation, but you can offset that by investing in inflation-indexed bonds, and stocks serve as a hedge against inflation too, at least in the long run.

CurlyDave
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Re: How much is too much in savings account?

Post by CurlyDave » Sat Nov 10, 2018 1:49 am

Whocares1000 wrote:
Thu Nov 08, 2018 12:41 pm

... you need a decent emergency fund depending on your circumstances. If you think you might be out of work for 9 months, you might want a 9 - 12 month emergency fund rather than 6 months. After that, short term savings such as another vehicle or a down payment on a home should be in savings unless you plan to wait more than 5 - 10 years for those purchases...
I have been out of work, and during general hard times, jobs were scarce. There was no way of predicting how long the situation would last.

My experience was that 6 months of normal expenses in an EF could easily be stretched to a year or more of reduced living expenses in a true emergency. And, without suffering much loss of quality of life. Rent or mortgage can't be cut back, but lots of things can. Modern job searches do not consist of "pounding the pavement". Every day I would complete a to-do list, look at on-line and newspaper ads, go to a job fair or something like that. But, after that is done there is spare time. I became a coupon-clipper and a bargain hunter. Every possible postponable expense was put off. Part time work and handyman gigs were also useful. Even a modest EF can last a lot longer than many think.

I think we give up a lot of return by insisting on too much "safety".

Whocares1000
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Re: How much is too much in savings account?

Post by Whocares1000 » Sat Nov 10, 2018 8:07 am

CurlyDave wrote:
Sat Nov 10, 2018 1:49 am
Whocares1000 wrote:
Thu Nov 08, 2018 12:41 pm

... you need a decent emergency fund depending on your circumstances. If you think you might be out of work for 9 months, you might want a 9 - 12 month emergency fund rather than 6 months. After that, short term savings such as another vehicle or a down payment on a home should be in savings unless you plan to wait more than 5 - 10 years for those purchases...
I have been out of work, and during general hard times, jobs were scarce. There was no way of predicting how long the situation would last.

My experience was that 6 months of normal expenses in an EF could easily be stretched to a year or more of reduced living expenses in a true emergency. And, without suffering much loss of quality of life. Rent or mortgage can't be cut back, but lots of things can. Modern job searches do not consist of "pounding the pavement". Every day I would complete a to-do list, look at on-line and newspaper ads, go to a job fair or something like that. But, after that is done there is spare time. I became a coupon-clipper and a bargain hunter. Every possible postponable expense was put off. Part time work and handyman gigs were also useful. Even a modest EF can last a lot longer than many think.

I think we give up a lot of return by insisting on too much "safety".
The thing is, there is no one size fits all to this. Some people may need to keep aside only 3 months of expenses. Others may need to keep aside 12 months. For example, I am still going through cancer treatment and have a disability which makes it hard to find another job should I lose the one I have. I therefore go to the high side of 12 months. Someone who is healthy, has a very stable job or can get a new one the next day, and has no debt can probably get away with 3 months.

I think of the Emergency Fund as insurance (the cost of which is the return I give up). Each person purchases the amount of insurance they need. I might get more than you and in both cases, we would be correct.

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