Lately, I’ve been contemplating a financial dilemma: how much cash is too much to keep in my savings account? I, like many others over 40, have become increasingly frustrated with traditional financial advice and investing strategies. As I aim to find the right balance between saving for emergencies and making the most of my hard-earned money, it’s essential to figure out the ideal amount to set aside in savings.
Particularly with, at the time of this writing in early 2023 and inflation still being rampant, it’s a very timely question.
Navigating through the vast ocean of financial advice, I wonder, is there really such a thing as having too much cash in savings? It’s a common question for those seeking financial stability and growth in our increasingly uncertain world. By digging deeper into this topic, I hope to find the answers that will help me optimize my savings strategy.
As I embark on this journey, I am considering the factors that impact my personal financial situation. Does keeping a larger cash reserve limit my investment opportunities? Is my emergency fund sufficient, or am I playing it too safe? These are the questions I’ll be exploring to make the most informed decision for my financial future.
- Having 3-6 months of living expenses in your savings account is generally recommended, serving as an emergency fund.
- Excess cash beyond the emergency fund may yield little returns when kept in a traditional savings account due to relatively low-interest rates.
- Other investment options for excess cash include stocks, bonds, exchange-traded funds (ETFs), and mutual funds, each with a risk profile and potential returns.
- High cash value life insurance is a lesser-known option that can yield reasonable returns while storing cash in a place unrelated to Wall Street’s turmoil.
- The 50/30/20 rule is a popular budgeting method, allocating 50% of income to needs, 30% to wants, and 20% to savings and debt repayment.
- Managing discretionary spending can help maintain a balanced budget and prevent excess cash in savings.
- Alternatives for cash allocation can include purchasing cash-flowing investments like dividend-paying stocks, rental properties, peer-to-peer lending, precious metals, or even Bitcoin, depending on one’s risk tolerance and financial goals.
Determining the Ideal Savings Amount
Assessing Your Financial Situation
As someone over 40 who might be frustrated with traditional financial advice, I first had to take a hard look at my financial situation. For me, it was essential to determine my monthly expenses, debt, and income sources. Additionally, I had to consider factors like job stability and potential future expenses, such as college tuition for my children or retirement needs.
To better visualize and understand my financial situation, I used tools like budgeting apps and spreadsheets. This allowed me to track spending habits and note areas where I could potentially save more. Consolidating expenses and income sources into one place created a clear roadmap for reaching my financial goals.
Setting Financial Goals
Once I had a better understanding of my financial situation, I was able to set short-term and long-term financial goals. Some examples of the goals I’ve set include:
- Building an emergency fund to cover 3-6 months of living expenses
- Saving for a specific purchase, like a new car or a family vacation
- Allocating a percentage of my income towards retirement
- Paying off high-interest debt
By breaking down my larger financial goals into smaller, more achievable targets, I found motivation in tracking my progress and staying accountable.
Savings Account vs. Investments
Wealth Management Options
When it comes to managing my finances, I often wonder whether I should keep cash in a savings account or consider other investment alternatives. Let me share some insights I’ve gained on this matter.
A savings account is a safe place to stash my money for future use, and my cash is protected up to $250,000 by the FDIC. However, I must bear in mind that holding too much cash in a savings account might not be the best decision. Why? Because the average savings account pays a relatively low return, sometimes even lower than the rate of inflation.
One lesser known option is high cash value life insurance. You can store you cash there, but still
Considering my financial goals and risk tolerance, I might explore some wealth management options like stocks, bonds, or exchange-traded funds (ETFs). These investments carry some risk, but also have the potential for higher returns than a typical savings account.
Another investment option I can look into is mutual funds. They allow me to pool my money with other investors and gain access to a portfolio of assets managed by professional fund managers. This can be an excellent way for me to diversify my investments and potentially generate better returns over the long term.
It’s crucial for me to evaluate the mutual fund’s past performance, fees, and potential risks before investing. By doing so, I’ll ensure that the fund aligns with my financial objectives and risk appetite.
Cash Value Life Insurance
One lesser known option is high cash value life insurance. You can store you cash there, but still get a reasonable (4%-ish) return while knowing that you cash is in a place not linked to the turmoils of wall street.
Building an Emergency Fund
Calculating the Necessary Funds
As someone who has been through the ups and downs of personal finance, I know how important it is to have an emergency fund. The first step in building one is to determine how much money you’ll need. Generally, financial experts recommend having three to six months of expenses saved up. To calculate your target amount, multiply your monthly expenses by the number of months you want to save. For example, if your monthly expenses are $2,000 and you want to save up for four months, your target would be an $8,000 emergency fund ($2,000 x 4).
For us, we like to keep six months of an emergency fund on hand. So to directly answer how much cash is too much, anything in excess of six months of cash on hand in any type of account is too much for us.
It’s worth considering that our financial situations and risk tolerance can vary as we age. As someone over 40, you might be more concerned about job stability or health issues, making a larger emergency fund more comforting. But how much is too much?
Now that you’ve figured out how much money you need to set aside, let’s discuss some strategies for building your emergency fund:
- Budgeting: Start by creating a budget and sticking to it. This will help you identify areas where you can cut back and save more. One very common budgeting rule is the 80-15-5 money rule.
- Automatic Savings: Set up automatic transfers from your checking account to your emergency savings account. This makes saving consistent and effortless.
- High-Yield Savings Accounts: To make the most of your money, consider saving in a high-yield savings account to earn interest on your balance.
- Extra Income: If possible, explore ways to increase your income, such as taking on a side gig or selling items you no longer need.
Remember that building an emergency fund takes time, and it’s essential to stay focused on your goal. Keep in mind that the importance of having a safety net cannot be overstated. As we navigate life’s uncertainties and financial challenges, an emergency fund can provide us with the peace of mind we deserve. We never want to get to the point of having no money or retiring without savings.
Budgeting and Savings
As someone who’s been through the ups and downs of personal finance, I know how important it is to have a solid budget and a healthy amount of savings. In this section, I’ll share my insights on two helpful strategies for managing your money and ensuring you’re not keeping too much cash in savings: The 50/30/20 Rule and Managing Discretionary Spending.
The 50/30/20 Rule
The 50/30/20 Rule is a popular method of budgeting that can put you on the right track towards financial stability. Here’s a breakdown of how this rule works:
- 50% of your income should be allocated to needs (housing, utilities, groceries, etc.)
- 30% to wants (entertainment, dining out, hobbies, etc.)
- 20% to savings and debt repayment
By following this approach, I’ve managed to maintain a balanced budget and ensure that I’m not keeping too much cash in savings.
Managing Discretionary Spending
Discretionary spending is the portion of your income that’s left over after covering your essential expenses. It’s easy to go overboard with spending in this category, especially as we get older and have more disposable income. I’ve found that being mindful of my discretionary spending helps me avoid keeping too much cash in savings, which can lead to missing out on higher returns elsewhere.
To manage my discretionary spending, I follow these steps:
- Set spending limits: First, I establish spending limits for various categories (e.g., entertainment, dining out, hobbies). This helps ensure that I’m not overspending in any one area.
- Track expenses: Regularly tracking my expenses in each category is crucial for staying within the limits I’ve set. It’s a simple habit that keeps me accountable.
- Adjust as needed: If I notice that I’m consistently going over my limits, I reassess my spending habits and make adjustments to stay on track.
By incorporating the 50/30/20 Rule and keeping a close eye on my discretionary spending, I’m able to maintain a balanced budget and avoid having too much cash in unproductive savings. With these strategies in place, it’s made my journey towards financial stability much smoother and more enjoyable.
Strategic Asset Allocation for Excess Savings After 40
Why Traditional Savings Strategies May Fall Short After 40
As I’ve gotten older and amassed more savings, I’ve realized that traditional savings strategies may not always be the best approach. When we reach our 40s, we often find ourselves in a different financial situation compared to when we were younger. Perhaps we’ve paid off our mortgage or have fewer expenses, leading to excess cash sitting in our savings accounts. But having too much cash can also be a problem, as maintaining cash levels in excess of 5 percent for investors with at least a 10-year time horizon may not be optimal.
With that in mind, it’s worth considering alternative asset allocation strategies to maximize our returns and accomplish our financial goals.
Innovative Asset Allocation Strategies for Excess Cash – Purchase Cash Flowing Investments
So, what can we do with this excess cash to make it work harder for us? One effective approach is to look into purchasing cash flowing investments. These investments can provide a steady stream of income while maintaining long-term growth potential. Some examples include:
- Dividend-paying stocks: Stocks that consistently pay dividends provide a potential source of income and tend to be more stable compared to other stocks.
- Real estate investments: Rental properties, whether residential or commercial, can generate a regular income while also increasing in value over time. This is our own particular favorite strategy. While your assets may not be as liquid as in other investments, it can return a great return and cash flow at the same time. Our favorite strategy is through turnkey real estate making it as hands off as possible.
- Peer-to-peer lending: By lending money to individuals or businesses through online platforms, we can generate interest income that may be significantly higher than savings accounts or certificates of deposit.
- Precious Metals: Gold and silver are time tested places to keep excess cash. For us, these fall more into the category of a hedge against inflation, but it’s hard to argue with a cash storage strategy that is thousands of years old. We like to keep maybe 1-5% of our own extra cash in both.
- Bitcoin: A very popular option, particularly in the last 5 years. In my mind, the value of bitcoin is in it’s value not associated with any currency (like the dollar), and it’s ease of trade with blockchain technology. As for ourselves, we don’t have any of our money in bitcoin as I view it as too volatile a place to store excess cash.
Remember, it’s essential to assess your risk tolerance and financial goals before making any decisions about reallocating savings into cash flowing investments. But as we continue to navigate our 40s and beyond, exploring innovative asset allocation strategies can help us secure a brighter financial future.
Frequently Asked Questions (FAQs)
Q: How much cash should be kept in a savings account?
A: Generally, it’s advisable to keep 3-6 months of living expenses in your savings account as an emergency fund. However, any excess cash might be better invested elsewhere for higher returns.
Q: What are the alternatives for cash exceeding the ideal amount in a savings account?
A: Excess cash can be invested in stocks, bonds, ETFs, mutual funds, or high cash-value life insurance. Other options include dividend-paying stocks, real estate, peer-to-peer lending, precious metals, and Bitcoin.
Q: What strategies can be used for managing personal finances and savings?
A: One helpful approach is the 50/30/20 rule for budgeting, where half of your income covers needs, 30% covers wants, and 20% goes towards savings and debt repayment. Building an emergency fund is another crucial strategy.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor owning properties in multiple states.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here.