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How Much Cash Should I Keep in Savings Account

min read

investing-money-cashHow much is too much money in a savings account? You may think you can never have too much money, but there are things that can limit the maximum amount in a savings account or other deposit accounts.

These limits can affect how well your money is protected and how much you earn on that money. In short, if you want to get the most out of your savings, it pays to stay within certain limits.

What Determines the Maximum Amount in a Savings Account?

It's very rare to find a bank that limits the amount you can deposit with them. After all, banks get temporary use of the money in their deposit accounts, and they put it to work in money-making pursuits like lending.

However, while the bank may welcome as much money as you're willing to put into your bank account, two things may prevent you from getting the most out of your money if you have too much at one bank:

  1. Some banks have rate tiers that cap the amount of money that can earn their best interest rate.
  2. Federal Deposit Insurance Corporation (FDIC) insurance limits put a cap on how much of your money is protected at any one bank.

Rate Tiers: How Account Size Affects Interest Rates

The structure of a bank's rate tiers might limit how much you should keep in a savings account.

What is a rate tier?

A rate tier is a schedule that assigns different interest rates to accounts depending on how much money is in those accounts. You might have to keep a certain minimum balance in order to earn the best interest rate, but sometimes banks also put a limit on the maximum amount that can earn that best rate.

Here's an example of a tiered rate schedule:

Account Balance Interest Rate

$0 to $10,000

0.25%

$10,001 to $100,000

1.00%

Amounts above $100,000

0.25%

In the case of this account, while there is no hard-and-fast limit on how much you could put in the account, you won't earn the best interest rate if you exceed $100,000.

Why do banks do this? Often because they are offering a promotional rate to attract new customers but they want to make sure they don't pay out too much money at that rate.

In any case, before you sign up for a savings account, you should know what the rate tiers are. That will help you try to maintain a balance level that earns the best rate available for that account.

FDIC Insurance Limits Keep Your Money Safe

FDIC insurance is a bank-funded, federally backed insurance program that protects the money that's on deposit at participating banks against a failure of the bank. This insurance makes participating deposit accounts the safest place you can keep your money.

Bank failures have been rare in recent years; but in the aftermath of the last financial crisis, over 450 banks closed in just a five-year period. Without FDIC insurance, customers at those banks would have faced a difficult legal process to try to recoup even a portion of their deposits, probably at pennies on the dollar.

FDIC insurance makes sure that depositors can get their money back in full when insured banks fail, but there is a catch: FDIC insurance is limited to $250,000 per depositor, per financial institution.

Note that this $250,000 limit applies across all your accounts at a given bank. So, if you have a checking account and a savings account at the same bank and the total of these two accounts exceeds $250,000, then that excess amount is not covered by FDIC insurance even if each of the accounts individually is below the limit.

So, while you are allowed to have more than $250,000 in a savings account, exceeding that amount in deposits at any one bank will reduce the amount of FDIC insurance coverage you receive.

Spread Your Money Among Different Banks

As shown above, while there is no hard-and-fast limit on how much money you can put in a savings account, the FDIC insurance maximum can limit how much of that money is protected, and certain rate-tier structures can limit how much earns the best interest rate.

The answer, then, is to spread your money among different banks. This can help you keep your money fully protected and earning the maximum amount it can.

Here are some tips for how to do that:

  1. Leave room to grow: Aim a little short of the FDIC insurance limit

    With that coverage limit at $250,000, you could open a savings account in that amount and be fully covered. However, as soon as that account starts earning interest, it will be over the FDIC insurance limit - so some of your money wouldn't be protected. Open accounts that are a little below that limit, to leave them room to grow.

  2. Diversify among types of financial products

    If you have enough money that you have to be concerned about exceeding the FDIC insurance limit, then you probably don't need to have all that money in savings accounts. Part of the attraction of savings accounts is that you can withdraw money at any time, but how likely are you to need hundreds of thousands of dollars in cash all of a sudden? Consider putting some of that money into long-term CDs to earn higher interest rates.

  3. Find the best rates for each product type

    If you decide that putting your money into different types of accounts makes sense, the nice thing about spreading those accounts among multiple banks is that different banks may have the best terms for different products.

    The bank with the best 5-year CD rate, for example, might be different from the one with the best savings account rate, and yet another bank might offer the best deal on checking accounts.

    Spreading your money among different banks gives you more latitude to find the best offer for each type of account you have.

  4. Watch out for different bank brands with the same parent institution.

    Sometimes banks operate different brands under the same parent company. That parent company may be considered as a single institution for FDIC insurance purposes; so even though you think your money is at different banks, effectively it isn't.

    The FDIC's Bank Find feature is an excellent place to find more information about your bank, including whether it is owned by another entity.

How to Choose Your Next Bank

If rate tiers or FDIC insurance limits prompt you to spread your money around to different financial institutions, here are some tips you can use to choose your next bank:

  1. Compare rates at your account size

    Comparing interest rates is important when choosing deposit accounts. Be aware of each bank's rate tiers so you compare the interest rates that your account would receive.

  2. Look for consistency

    Interest rates on savings accounts and money market accounts are subject to change at any time. However, some banks have been consistently among the leaders in offering high rates. Selecting one of these banks can increase your chances of continuing to earn a very competitive rate through different economic climates.

  3. Avoid teaser rates

    Teaser rates are short-term promotional rates designed to go away after your account has been at the bank for a month or two. In the long term, teaser rates don't make much of a difference. You should compare the standard rate schedules for banks rather than being swayed by promotions or teaser rates.

  4. Watch out for fees

    Fees are very important in checking accounts, but some savings accounts also charge a monthly maintenance fee which effectively reduces the amount of interest you earn. In addition, when you sign up for a CD, make sure you know what the early withdrawal fee would be, just in case.

Rate Differences Are Magnified in Larger Accounts

Making sure you don't have too much money in a savings account is a nice problem to have. It means you have a fairly large amount of money at your disposal. The only question is where to place that money.

People tend to assume that savings account rates are fairly similar from one bank to another. This is far from the truth. The latest MoneyRates.com America's Best Rates Survey found several banks offering more than four times the average savings account rate.

What makes that even more significant in the context of large account balances is that these rate differences are magnified in large accounts.

Consider the difference between a 2.0% rate, which would be among the rate leaders, and a 0.40% rate, which would be about average.

On a $1,000 account balance, the 2.0% rate would earn $20 a year in interest while the 0.40% rate would earn $4. You may not find that $16 difference worth the time it takes to search for the higher rate.

On a $200,000 balance, though, the 2.0% rate would earn $4,000 a year in interest while the 0.40% rate would earn $800. That difference of $3,200 a year should make it well worth your while to do a little extra research to find a better rate.

Rate tiers and the FDIC insurance cap mean that there are situations where you should limit how much money you have at any one bank. If you have enough money to be concerned about those limits, then you should be well rewarded by shopping around to find the best places to put your money.

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