Why $50K in Savings Is Probably Too Much

Having "too much" money in savings sounds like a great problem to have. Most Americans would feel a lot more relaxed if they had a cash cushion of $50,000 or more.

But unless that $50K is set aside for a specific purpose, there's a good chance it's actually holding you back. While a savings account is essential, putting all your spare cash in savings can turn out to be a big mistake.

Here's why.

How much you really need in savings

Savings accounts are great for two things:

• Emergency funds. Money you may need if you lose your income or get hit by a big, surprise expense. For most people, six months' worth of expenses is plenty.
• Near-term goals. Cash you plan to spend on a big expense within the next few years, like a car, a vacation, a down payment on a home, etc.

You want this money to be safe and easy to get to, which is why a high-yield savings account is the perfect place for it.

But once you have enough money in savings to cover emergencies and near-term goals, it's time to look elsewhere.

Most people need to invest for growth

Keeping all your cash in savings is riskier than you may think.

You're not at risk of losing money, as long as you don't keep more than $250,000 at a single bank (the FDIC insurance limit). But you are at risk of being cash-strapped in retirement because your money didn't grow enough over the years.

Even the best high-yield savings accounts barely earn enough interest to beat inflation. The average American worker needs to take a little risk and invest some money in order to build a decent retirement nest egg.

How much could those extra savings earn?

The U.S. stock market has gained an average of about 10% per year over the past several decades, as measured by the S&P 500 Index.

Let's say you keep $50,000 in savings, but you only need $20,000 for emergencies and near-term goals. That leaves $30,000 sitting on the sidelines.

If you instead invested that $30,000 and earned a modest 7% per year, it could grow to roughly:

• $59,000 in 10 years
• $116,000 in 20 years
• $228,000 in 30 years

That difference could mean retiring earlier and more comfortably.

It's true that stocks often lose value in the near term. But over the long term, they've delivered very high returns. That's why it's smart to invest money that you won't need for about five years or more.

Where should you put the extra money?

For long-term goals, I recommend starting with an individual retirement account (IRA), because:

• You can save a fortune in taxes on your investments (so long as you follow the rules)
• You can buy a wide range of investments through an IRA
• Opening an IRA is easy, and anybody who earns income can do it

You don't need to get fancy with your investments. I mostly purchase low-fee S&P 500 index funds and let time do the work. That simple approach has earned me a bundle over the years.

Want to get started? Click here to learn more about IRAs and open an account with one of the best brokers.

There's no one-size-fits-all answer, though. If you're unable to open an IRA, then you may want to open a regular brokerage account instead. If you have credit card debt, then paying that off is probably a higher priority than saving or investing.

What really matters is that all of your cash is going toward an important, concrete goal.

Still working on your savings? Start here

Most Americans don't even have a solid emergency fund, let alone $50K in the bank. Fortunately, there's one super easy way to help your savings grow faster: opening a high-yield savings account (HYSA).

HYSAs earn about 10 times the national average interest rate, and they're just as safe as traditional savings accounts. You can open an account and move your savings in a matter of minutes. The only thing you may need to give up is a physical bank branch.