Here's What Happens if Your Savings Account Balance Is Too High

It is a good thing to have money in a savings account. After all, you need to be prepared for emergencies, and putting money into savings means it will be there and ready for you to cover unexpected expenses.

If you have short-term goals and will need to access your money soon, a savings account can also be a good place for it, since you won't risk losing any of it. And it won't be mixed in with funds in your checking account, where you're more likely to spend it.

But while it's good to have some money in savings, you don't want too much. Here's what could happen if you end up with an overfunded savings account.

1. You could miss out on better opportunities with your money

One big issue is that you could miss out on other opportunities if you have too much in savings. Right now many high-yield savings accounts are paying APYs above 5.00%, but that's an unusually high rate and it's not likely to last indefinitely. Savings account rates tend to move with the federal funds rate, which is high right now thanks to the Federal Reserve's actions against inflation.

Even if it did stay fixed for a time, a 5.00% return isn't that great -- especially when you could reasonably expect a 10% average annual return if you invested in an S&P 500 index fund (a fund that tracks the performance of around 500 of the largest U.S. businesses). There's a big opportunity cost to accepting smaller returns than you could get if you invested.

If you won't need the money you are saving for around three to five years, it does not belong in a savings account. In savings, it may barely earn enough to keep pace with inflation. That money should be invested, so you can benefit from more generous returns which can, in turn, be reinvested and help your balance grow even bigger.

2. You could be very vulnerable to fluctuations in interest rates

There's another big downside to having too much in savings. Savings accounts have variable rates. If interest rates decline, this means you will earn less on the money you have in your account.

This isn't a huge deal if you have only the amount invested that you need for emergencies and short-term goals, since you probably won't have that much in savings. But the bigger your balance, the more you could be impacted when your rate changes.

There's another great option if you don't want your money at risk of being lost, but you want protection from these fluctuations in interest rates. You could put some of your funds into a CD. Certificates of deposit guarantee your rate for the duration of the CD term and they are also typically FDIC insured, just like savings accounts, so you won't risk loss, up to FDIC insurance limits.

CDs come with set terms, typically ranging from three months to five years. You can't take money out without penalty during your CD term, but your rate also won't change. So, if you are saving for a short-term goal but won't need the money for six months, or a year or two, a CD could be a better place for it than savings.

If you don't take advantage of the chance to open a CD and instead keep all that cash in savings, you could end up with a lot less money than you expected if your account's rate goes down.

3. You could put your money at risk

Finally, if you really have a lot of money in savings, you could actually risk losing it. That's because the FDIC insurance limit is $250,000 per person, per account. If you have more than this, unless you spread it around to different banks, you might not get back everything you put in.

For all of these reasons, you should avoid keeping too much in your savings account. Store the money in your account that you'll need soon, and consider opening a brokerage account or CDs for the rest of it.