If you’ve managed to accumulate a significant amount of money in your cash savings — good for you! But if your stash goes beyond what’s needed for your emergency fund, you may want to step back and ask yourself: Is there a better way that I could be putting my money to work toward my financial goals?
While there’s nothing quite like the security and peace of mind that comes from knowing that you’ve got enough cash to weather any surprise life throws at you, setting aside too much money in cash isn’t always a good strategy.
“Just because you’re hoarding your savings in cash doesn’t mean you’re avoiding all risk,” says Jennifer Raess, CFP®, advice integration lead at Northwestern Mutual. “In fact, you’ve got to think very seriously about the risks of inflation, as well as the foregone returns that you’re giving up by not putting your money to work.”
Money sitting in a standard savings account these days earns next to nothing in the form of interest — just an average of 0.06 percent annually as of March 2022. That’s nowhere near enough to match the historical rate of inflation. That means that every year that you leave your money in a savings account, you’re actually losing purchasing power.
For example, according to the US Bureau of Labor Statistics’ inflation calculator, you would need more than $83,000 today to have the same amount of purchasing power as you would have had with $50,000 in the year 2000 — nearly 66 percent more money!
Raess recommends that once you’ve got enough money set aside that you feel comfortably covered in the event of an emergency, you should begin putting the excess funds to work.
How much is enough savings?
While everyone’s financial situation is different, most individuals should have at least six months’ worth of expenses set aside in an emergency fund. This should be enough to see most people through most surprise expenses or a significant period of unemployment. For some people, the magic number might fall closer to nine months’ worth of expenses, or even 12 (in the case of someone who is self-employed or working in a volatile industry).
“Twelve months is where I would typically draw the limit,” says Raess. “Beyond that, there are just better ways of allocating your funds than to keep them in a savings account.”
Options for risk-averse individuals
When you start looking at ways to put your money to work, you’ll find that investing is a great way to build wealth over time — as long as you are comfortable with a certain level of risk. If you are particularly risk-averse but still want to put your money to work, Raess offers the following options:
1. Pay off high-interest debt
When you pay off debt ahead of schedule, you either reduce or eliminate the total amount of interest that you must pay over the life of the loan. In other words, you can think of these interest savings as an instant and risk-free form of return.
If you do carry debt — particularly high-interest debt such as credit cards or personal loans — using some of your savings to pay it down can be a great way of putting your money to work.
2. Consider TIPS or I bonds
Treasury inflation-protected securities (TIPS) and I bonds (Series I savings bonds) are securities issued by the United States Treasury that are indexed to inflation. This means that the amount they yield each year is dependent on the current rate of inflation as determined by the consumer price index (CPI). When inflation rises, TIPS and I bonds earn more interest; when inflation is lower, they earn less interest.
Raess says this means that both TIPS and I bonds can offer a relatively low-risk way of keeping up with inflation and protecting your purchasing power — especially when compared to cash held in a standard savings account.
3. Consider adding whole life insurance to your financial plan
If you have a need for the death benefit life insurance offers, another option to consider is adding whole life insurance to your financial plan.
Over time, a whole life insurance policy will accumulate cash value. If your insurance policy pays dividends, you can also choose to use them to purchase additional insurance, which results in increased cash value over time. That cash value is guaranteed to grow in a tax-advantaged way over time (though the exact rate of growth can vary from year to year), making it ideal for those who are risk-averse.
Best of all, because you can access cash value at any time and for any reason, at some point, you could consider the cash value as a backup for your emergency fund.
4. Don’t completely write off traditional investment opportunities
A well-diversified investment portfolio that is aligned with your personal risk tolerance and investment horizon — especially when paired with some of the options discussed above — can help you grow your money without taking on undue risk.
“Whatever your risk tolerance is, there’s almost always an option that can help you increase your yield compared to cash savings,” Raess says. “A skilled financial advisor can help you understand your options and design a plan that meets your needs.”
Information is provided for educational purposes only and is not a recommendation for any particular investment. All investments carry some level of risk including the potential loss of all money invested. No investment strategy can guarantee a profit or protect against loss. The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement income will reduce the death benefit and may affect other aspects of the policy.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.