3 Signs You Have Too Much Money in Savings

Having money in a savings account is important. You'll want to keep some emergency money in a high-yield savings account so it's accessible in case an unexpected expense pops up. And you may also need money saved for other things, such as when you're making a big purchase you don't want to put on a credit card.

But while you do want to have a healthy savings account balance, you don't want too much cash in this account because the potential ROI (return on investment) it can provide is much lower than you could get if you invested the money elsewhere. In fact, the average savings account interest rate is consistently less than 0.50%, which is well below the typical rate of inflation. It's also much less than the 10% average annual returns you could expect if you invested in the S&P 500.

The big question, though, is how do you know if you have too much in savings? While this can be tricky to answer, you should watch out for these three signs that your savings account balance may be too big.

1. You haven't calculated your savings needs

You should have money in savings if you need it for specific things, such as:

1. You are going to use it for a big purchase you can't afford right away but plan to make in the next few years (such as a home down payment).
2. You are saving the money for emergencies, so you need to be able to access it at any time.

You should calculate exactly how much to put into savings accounts for each of these purposes in order to avoid ending up with an account balance that is larger than you need it to be.

So, for example, if you want to buy a $350,000 home with a 20% down payment, you would calculate that you need a balance of $70,000. If you want to take a $5,000 vacation, then you'd need to add that to your desired savings balance. And if you spend $4,500 a month and want an emergency fund with six months of living expenses, you would need an additional $27,000. If your savings account balance exceeded $102,000, you would have too much.

If you haven't actually gone through the process of identifying a purpose for your saved funds, then you may end up with more than you need sitting in this account slowly losing value. In fact, it might be a better idea to set up different savings accounts for each goal and establish a desired balance for each account. That way, you can monitor how you're doing on hitting that target and avoid having too much or too little in savings.

2. You have money in savings you aren't planning to need soon

If you have money in savings that you do not plan to use for five or more years (say, retirement savings), you have too much money in savings. Those funds should move into an investment account where you can earn reasonable returns on them, so you don't lose buying power by having your money just sitting there.

If you have an extra $5,000 in savings, even if you have it in a high-yield savings account, at best you'd probably earn around 4.00% per year, or $200, in interest. You'd lose out on $300 in interest compared with what you could earn if you earned a 10% return in an S&P fund. And the more extra money you have in savings and the longer it sits there, the more you lose out.

Take a look at your account balances and see how much is in savings and why. If you have money in savings you're planning on using for a long-term goal, move it into a brokerage account.

3. You're afraid to open an investment account

Finally, the last red flag suggesting you have too much in savings is if you are afraid to open a brokerage account at all. After all, for most people, their spare cash will either go into savings or be invested -- and you need a brokerage account to invest.

The good news is, getting started with investing doesn't have to be frightening. There are many great brokerage firms that have no minimum deposit requirements and that charge no commission fees.

Many of these firms also make it very simple to buy shares in an exchange-traded fund (ETF) that tracks the performance of the S&P 500, like the SPDR S&P 500 ETF, the Vanguard S&P 500 ETF, or the iShares Core S&P 500 ETF.

These funds track the performance of a financial index made up of around 500 large U.S. companies, so you get instant diversification and very limited risk of loss. You don't need any specialized knowledge to make this investment, you can expect pretty consistent returns if you invest for a long time, and S&P 500 ETFs have very low fees.

Do not be afraid to get your money into the market where it can work for you. Put the amount you need in savings based on goals you have calculated, and then invest the rest. You'll end up a lot better off in the end.