Here's What Happens When You Leave Too Much Money in Your Savings Account

"Cash is king" gets thrown around a lot in money conversations. And to be fair, cash does play an important role. It gives you flexibility and buys peace of mind.

But taken too literally -- or pushed to the extreme -- that advice can actually work against you. The problem is that excessive cash can slow your progress, shrink your buying power, and hold you back from long-term growth.

Here's why keeping too much money in cash isn't the safe move it's often made out to be, and what works better instead.

Why "too much" in savings creates a long-term drag

High-yield savings accounts have been a gift over the past couple of years. Earning 4%+ on cash was a rare treat. But savings rates move fast -- and they're in a downward trend as the Fed starts to lower core interest rates.

Here's the issue: when your savings rate drops below inflation, your money loses buying power every single year.

The most recent inflation reading sits around 2.7%. If your savings account pays 2%, your money technically shrinks after inflation -- even though the balance goes up.

Having cash on hand in a savings account is still valuable. It just isn't designed to beat inflation over decades. And the more excess money you save, the more you lose.

By the way, the national average savings account pays just 0.39% APY. That's waaaay below inflation. If you are sitting on a lot of cash, always shop around for the top high-yield savings accounts -- some pay 10X the national average.

$20,000 saved vs. invested long-term

Another downside of leaving money in savings is opportunity cost. Over long stretches of time, invested money grows much faster than cash sitting on the sidelines.

To see how big that gap can become, here's an example.

Assume you start with $20,000. Let's compare one path earning a steady 2% in a savings account. The other earns an average 8% annually in a broad stock market index fund.

Here's how that same $20,000 grows over time:

Same starting money, but completely different outcomes.

This is the power of compounding doing what it does best. The longer your money has to grow, the wider the gap becomes. And the harder it is for savings alone to keep up.

That's why the real win usually comes from using savings for short-term needs and investing in stocks for long-term goals.

How much cash actually makes sense?

There is a healthy middle ground when it comes to cash. For most people, that sweet spot falls between three and six months of living expenses.

This range gives you breathing room if something unexpected pops up, while still allowing the rest of your money to work harder elsewhere.

Here's how many people think about where they land in that range:

• ~3 months of savings works well if you have a stable income, dual earners in the household, or flexibility in your budget.
• ~6 months of savings can make more sense if your income is less predictable, you work in a vulnerable industry, or you just want extra peace of mind.

Anything beyond that emergency buffer usually has a better long-term home outside of a savings account.

That said, where you keep your cash still matters -- even for emergency money.

Savings rates vary a lot from bank to bank. If you're holding cash anyway, make sure it's earning a competitive rate. Compare today's top high-yield savings accounts to see which options are paying the most right now and find a better home for your money.