Is $25,000 Too Much to Keep in a Savings Account?

First off, there's nothing wrong with stashing large amounts of cash in a savings account, at least not from a financial perspective. If you're saving money rather than spending it, you're usually doing something positive for your financial health. That's something to celebrate, especially at a time when inflation has made it more challenging to save.

The problem, however, can come with opportunity costs. Savings accounts can protect your deposit and earn interest, but rarely will they grow your money as meaningfully as other investments, like stocks. They're relatively risk free, but are savings accounts the best place to keep $25,000? Let's examine the question from a few angles.

When it's prudent to keep $25,000 in your savings account

Two words: emergency savings.

If $25,000 equals three to six months of emergency expenses, a savings account is one of the best places for it. It doesn't matter if the stock market is bullish or there are opportunities in real estate to grow it 10-fold. Putting this money into a rainy day fund ensures that it will be there when your regular paycheck can't cover an unexpected expense.

Be that as it may, you can still earn decent interest on a $25,000 deposit when you put it in a high-yield savings account. At the very least, you can outpace inflation. Right now, the best high-yield savings account on our radar has a 5.36% APY. If you keep $25,000 in an account with a steady 5.36%, you would earn $1,340 on your savings in a year.

It's worth noting that since savings accounts have variable APYs, you might not earn 5.36% for an entire year. Even so, for easy withdrawals, savings accounts are still better for emergency funds than other investments, like certificates of deposit.

It's also fine to keep large lump sums for non-emergency reasons in a savings account, such as when you're saving for a near-term goal. Buying a house, planning a large purchase, or gearing up for a cross-country relocation are all good reasons to keep large amounts of cash within easy reach.

When it might be wise to spread your savings across other investments

If $25,000 is more than enough to cover six months of expenses, it might be worth looking into other investment options for at least a portion of it. Likewise, if you have an emergency fund plus a savings account with $25,000 that isn't designated for any immediate purpose (saving for a house, a dream vacation, a backyard patio), a savings account might not be the best place for it.

For example, if $2,500 is enough to cover one month of expenses, an emergency fund of $15,000 would be sufficient. You can then take that extra $10,000 and invest in stocks via a brokerage account.

To give an example, consider the S&P 500. This index's average annual return over the last 50 years has been about 10%. If you invested $10,000 with that same return, your money would grow to roughly $25,900 after 10 years.

That sum would be more than what you started with -- counting the $15,000 in your emergency fund -- and could continue to grow if you left it undistributed.

Of course, outside the neat box of this example, there are several market risks to consider, like volatility. In 10 years, the stock market could take a turn for the worse, eliminating a large portion of your gains. Leaving your money invested for long periods can flatten these losses with substantial gains, but it's never easy to stomach negative numbers while they're happening.

That's why it's important for investors to have an emergency fund in the first place, as it can prevent them from having to sell out at the worst time to free up cash. If keeping $25,000 in a separate savings account prevents you from dipping into your brokerage account when you need it, then it's worth it -- even if it doesn't have as much earning potential as the stock market.