When deciding how much money to keep in a bank account, you should reflect on a few things:
• How quickly will you need access to your money?
• What rate of return will you be able to get?
• How high are the deposit insurance limits for your bank?
• How much money are you likely to need for an emergency?
• Are you saving up for a large future expense?
Let’s take a closer look at each of these considerations:
Liquidity
A major benefit of having cash in the bank is the peace of mind that comes from financial security. Unlike typical retirement accounts and investment accounts, a traditional savings account is extremely liquid. With most savings accounts, you can transfer money in and out of the account as you wish. The Federal Reserve used to limit the number of withdrawals that consumers could make from their savings accounts each month, but in October 2022 this regulation was suspended indefinitely. Some banks may still institute their own withdrawal limits, but many banks (including Bank5 Connect) do not limit the number of withdrawals you can make from your savings accounts.
Rate of Return
Historically, consumers have been warned against placing too much money in a savings account, for fear that doing so could cause them to miss out on potential higher rates from investments like stocks, bonds, and mutual funds. However, interest rates on these types of investments are usually not guaranteed and your money is not insured. In other words, some investments can be very risky. As such, most consumers try to balance their investment portfolio’s risk with its potential returns. What many consumers do not realize, is that savings accounts can now be a viable investment vehicle as well. Consumers no longer have to agree to dismal interest rates on their savings accounts. Many banks offer highly competitive savings rates. As of July 2023, there are online banks offering savings accounts with rates exceeding 5.00% APY, including Bank5 Connect. And while most traditional checking accounts don’t earn interest, many online banks offer high interest checking options as well.
Deposit Insurance
Most banks offer protection on bank deposits in the form of FDIC insurance. FDIC insurance typically covers up to $250,000 per depositor, per account ownership category, per bank. However, many people don’t realize that there are banks out there that offer additional insurance protection. Bank5 Connect, for example, is a member of the Depositors Insurance Fund, also known as DIF. All DIF-member banks offer 100% deposit insurance. What this means is that any funds in a deposit account at a DIF-member bank that exceed FDIC limits are insured by DIF. So, at Bank5 Connect all savings accounts (as well as checking accounts and CDs) are insured in full, past FDIC limits.
Emergency Funds
Most financial experts advise having at least six months of living expenses saved up for emergencies. This strategy provides financial protection if you get sick, lose a job, or face other unexpected challenges. For example, if you typically need around $5,000 in income to survive each month, ensure that you have at least $30,000 in an easily accessible bank account.
Future Expenses
If you’re anticipating purchasing a home in the not-too-distant future, you should ensure that you have sufficient funds for a downpayment in a savings account. When you find the home of your dreams you don’t want to miss out by having the necessary funds tied up in an investment account or a CD. Likewise, if you’re planning to buy a car, you’re better off having that cash in a liquid bank account than you are having it sitting in stocks and bonds. When deciding how much money you should keep in a savings account, it’s a good idea to estimate all of the large future expenses you might have in a year’s time.
Ultimately, how much cash you should keep in a bank account will depend on your unique financial situation and your current financial goals. By evaluating your liquidity needs, desired return on investment, risk tolerance, and future expenses, you’ll be able to effectively determine the optimal bank account balance for you. And don’t forget that it’s always a good idea to speak with a tax professional or investment advisor before making any major investment decisions.