Here's What Happens When Your Emergency Fund Is Too Big

No matter what financial guru or planner you follow, most seem to agree on at least one principle: You should aim to have emergency savings stored in a safe, accessible place, like a savings account at a bank. Where they differ, however, is in how many months of savings you should have.

More often than not, financial experts will advise you to save between three to six months of living expenses. But it's not uncommon to hear even larger numbers, like six to 12 months, or, for those nearing retirement, one to two years' worth of emergency savings.

It's important to have money set aside to cover surprise bills or help you stay afloat if you lose a source of income. But too much money in a savings account isn't always a smart idea and could work against your ability to build wealth over long periods.

Inflation can work against big emergency funds

Emergency funds are best kept in FDIC-insured savings accounts, which have maximum security, little risk, and flexible withdrawals. These accounts are not the best choice for long-term growth, but they guarantee your money will be safe up to $250,000 per depositor per bank ($500,000 for a joint account).

Our Picks for the Best High-Yield Savings Accounts of 2024

Product	APY	Min. to Earn
American Express® High Yield Savings Member FDIC. APY 3.80% Rate info 3.80% annual percentage yield as of January 9, 2025. Terms apply. Min. to earn $0 Open Account for American Express® High Yield Savings On American Express's Secure Website. Member FDIC.	3.80% Rate info 3.80% annual percentage yield as of January 9, 2025. Terms apply.	$0	Open Account for American Express® High Yield Savings On American Express's Secure Website.
Capital One 360 Performance Savings Member FDIC. APY 3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings On Capital One's Secure Website. Member FDIC.	3.80% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of Dec. 6, 2024. Rates are subject to change at any time before or after account opening.	$0	Open Account for Capital One 360 Performance Savings On Capital One's Secure Website.
Western Alliance Bank High-Yield Savings Premier Member FDIC. APY 4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website. Member FDIC.	4.40% Rate info The annual percentage yield (APY) is accurate as of Jan. 2, 2025, and subject to change at the Bank’s discretion. Refer to product’s website for latest APY rate. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.	$500 to open, $0.01 for max APY	Open Account for Western Alliance Bank High-Yield Savings Premier On Western Alliance Bank's Secure Website.

The problem with savings accounts, however, is that their APYs often don't outpace annual inflation. So while you might avoid investing risks by stashing large lump sums at a bank, you might also devalue your savings over a long period.

This year is unique in the sense that you can store money in a high-yield savings account with an APY that is above the annual inflation rate, which was 3% in June. Even so, the APYs on these accounts are not guaranteed and will fluctuate over time. You might earn 4.5% today -- a great interest rate for a savings account -- but if rates return to pre-2022 levels, outpacing inflation could become more difficult.

You could miss an opportunity to invest

Now, don't get me wrong -- if you're near retirement, it might be wise to have more cash in a low-risk savings account. But for those who have long time horizons -- who don't plan to retire anytime soon -- hoarding fat sums in a savings account can run the risk of growing your money too slowly and making it difficult for you to accomplish long-term financial goals, like saving for your retirement.

To grow your money at a higher rate of return, it might be a good idea to invest in the stock market, buy real estate, or start your own business. Not everyone is business-minded or wants to flip houses, but if you can stomach some risk, the S&P 500 could be a good place to park surplus savings. Over the last 30 years, the S&P 500 index has delivered a compound average growth rate of roughly 10.7% (before inflation). While you're not guaranteed 10.7% every year, keeping your money invested in an ETF or mutual fund that follows the S&P 500 could return something close to that if you stay invested and don't sell during market downturns.

Investing in individual stocks carry more risk and would require a more hands-on approach. You could, however, use a robo-advisor to help you create a portfolio that aligns with your risk tolerance and investing goals. Robots can't guarantee you higher returns than the S&P 500 or even a rate higher than today's top-paying CD. But keeping a long-term perspective and investing consistently over time has historically delivered investors better returns than the meager rates on savings accounts.

Strike a balance between saving and investing

Emergency funds are super important for your personal finance goals and can prevent you from depending too much on credit cards and personal loans. But if you're overfunding a savings account because you're worried you'll lose money in other assets, you might be selling yourself short. A massive emergency fund might give you peace of mind today, but investing for the long term could give you greater financial security and a nest egg to retire on.