Here's Why Dave Ramsey Thinks Putting Too Much in Savings Is Riskier Than Investing

You should read Ramsey's advice when deciding how much to put into your savings account.

Deciding what to do with your money can be pretty complicated. For many people, a savings account seems like a quick and easy option. You can put your money into savings without a lot of effort just by researching high-yield savings accounts (or opening a savings account with the bank where you maintain a checking account). You don't have to pick investments and, as long as you are below the FDIC insured limits, you shouldn't risk any financial loss.

But while you need to have some money in savings, you don't want to overdo it. In fact, finance expert Dave Ramsey warns that you actually take a bigger risk by over-investing in your savings account than you would by making investments in other assets like a 401(k) or brokerage firm. Here's why.

The big problem with putting too much into savings, according to Ramsey

According to Ramsey, putting too much into savings is actually a bigger risk than investing because a savings account will not pay enough interest to help you avoid losing ground as the cost of goods and services rise. That means you're likely to end up with a savings account that has far less buying power over time.

Ramsey explains: "If you bury your hard-earned money into a savings account or CD hoping to avoid risk, guess what? You may have avoided short-term risk, but you’ve also guaranteed that your money won’t grow enough to keep up with inflation long term. Which sounds riskier?"

Is Ramsey right?

Ramsey is 100% spot on that over-investing in a savings account is an extremely risky strategy and not one you want to employ.

You see, over time, the price of goods and services naturally goes up. This is called inflation. The Federal Reserve aims to keep the annual rate of inflation at around 2%, which means that overall, prices go up pretty slowly and steadily. But in most cases, a savings account will not pay you a 2% annual interest rate -- or, if it does, it won't pay you much above that rate.

If you get less than 2% interest and inflation is at 2%, your money loses ground. It's worth less when you take it out of your savings account than it was worth when you put it in. That's no way to build wealth. Even if you get 3%, your real rate of return would be less than 1% after taking taxes and inflation into account.

You need your money to work harder for you than that if you want to grow wealth without having to invest an absolute fortune. If you can put money into an S&P 500 index fund and earn average annual returns of around 10%, then you would obviously be able to grow your money more easily since those higher returns could also be reinvested and compounded over many years.

So, to avoid taking a huge risk of inflation eating away at your money, put only enough into savings to cover emergencies and purchases you'll need to make over the short term, and invest for your longer-term goals -- just as Ramsey recommends.