There is no definitive answer to how much money someone can have in their bank account. The amount largely depends on the individual’s financial situation and needs. However, there are some general guidelines and best practices when it comes to how much money to keep in a bank account versus invested elsewhere.
In this article, we’ll explore the factors that determine how much money you should keep in the bank, the pros and cons of keeping large sums in a savings or checking account, strategies for optimizing your bank balances, and the potential tax implications of having over certain amounts in your accounts.
What Determines How Much to Keep in the Bank?
Some key factors that determine how much money you should keep in bank accounts versus invested include:
- Your monthly and emergency expenses – It’s smart to keep at least 3-6 months of living expenses in a savings account for an emergency fund. This helps you avoid going into debt if you lose your income.
- Your investment goals and risk tolerance – Money you may need in the next 3-5 years should likely be kept in cash, while longer-term goals can be invested in the market.
- Interest rates – Today’s very low interest rates means you lose out on growth by keeping too much cash.
- Your debt obligations – If you have high interest debt like credit cards, pay that down before stockpiling too much cash.
As a general rule, it’s recommended to keep between 6-12 months’ worth of living expenses in cash savings accounts. Some also advise keeping up to 20% of your portfolio in cash alternatives like money market funds for stability and liquidity needs. The rest can be invested appropriately for your goals.
Pros and Cons of Keeping Large Sums in Bank Accounts
Here are some of the key pros and cons to consider when deciding whether to keep large amounts of money in checking or savings accounts:
Pros
- Liquidity – Bank accounts allow instant access to your money when needed.
- Principal protection – Up to $250,000 per depositor per FDIC-insured bank is protected if the bank fails.
- Ease of use – Checking accounts facilitate payments and transactions.
- Interest income – Savings accounts earn a modest amount of interest income.
Cons
- Low interest rates – Today’s interest rates don’t keep up with inflation.
- Opportunity cost – Money in savings loses out on potential market growth.
- Inflation erosion – Cash loses buying power over time.
- Too much liquidity – Discourages long-term saving and investment.
Given today’s low interest rates, keeping large cash reserves in the bank means missing out on the stock market’s higher potential returns. It also exposes you to the effects of inflation longer term.
Strategies for Optimizing Bank Account Balances
Here are some tips for optimizing how much you keep in checking and savings accounts:
- Keep just 1-2 months’ worth of expenses in your checking account for bills and spending. More can be vulnerable to fraud.
- Open a high yield online savings account. These offer higher interest rates for your emergency fund and extra savings.
- Consider CDs or short-term income investments for savings goals under 3 years.
- Invest appropriately based on your risk tolerance for longer-term goals.
- Have sufficient life and disability insurance for added protection rather than large cash reserves.
- Automate transfers from checking to savings and investments to optimize fund allocation.
The right bank account and investment allocation mix depends on your specific needs and risk tolerance. Work with a financial advisor if needed to develop the optimal personalized strategy.
Tax Implications of Large Bank Account Balances
For most individuals, there are no direct tax implications for having large amounts of money in savings or checking accounts. However, there are some potential tax situations to be aware of if your balances exceed certain thresholds:
- No tax applies to bank account interest earned under $10 annually. Over $10 is subject to income tax.
- Having over $10,000 in foreign bank accounts must be reported to the IRS via an FBAR filing.
- Unearned income over $2,200 for dependent children under 18 (the “kiddie tax”) may be taxed at the parents’ rate.
The main tax consideration is that money kept in low interest savings accounts loses purchasing power over time due to inflation. This can mean paying more taxes in the future even though the dollars saved stay the same.
Maximizing tax-advantaged retirement accounts like 401(k)s up to the annual contribution limits is often a better strategy than keeping too much cash in banks. This avoids current income tax and allows growth potential tax-free.
Recommended Bank Account Limits by Financial Situation
General Recommended Limits
| Account Type | Recommend Balance |
|---|---|
| Checking | 1-2 months expenses |
| Savings Account (Emergency Fund) | 3-12 months expenses |
| Money Market mutual funds | Up to 20% of portfolio |
For most average earners, having 6 months of living expenses in savings and limiting checking accounts to what you need for monthly bills is reasonable. Adjust based on your financial situation.
By Income and Net Worth Levels
Those with higher incomes or net worth may be able to keep larger cash reserves, though too much cash still results in lost growth opportunities.
| Income/Net Worth | Recommended Max Savings |
|---|---|
| Under $50,000 | $10,000 |
| $50,000 – $100,000 | $25,000 |
| Over $100,000 | $50,000 |
| Over $1 million net worth | $100,000 |
Aim to keep no more than 5-10% of total net worth in cash savings for wealthy individuals. The rest should be appropriately invested.
Conclusion
Determining ideal bank account balances involves assessing your specific income, expenses, financial goals, and risk tolerance. While there are no definitive limits, keeping 6-12 months’ worth of expenses in savings and limiting excess cash is wise for most people. Work with a financial advisor to determine what’s right for your situation, and optimize earning potential by investing surplus funds.
