Should you keep a high balance in a savings account in the bank?
Of course with the stock market constantly marching higher, you may be feeling that “FOMO” – i.e. Fear of Missing Out. However, having short term funds available to you is a smart idea. We call this an “emergency fund” in financial planning language and it’s there for needs like:
- Unexpected bill like your furnace exploding or car breaking down (or job loss).
- Opportunities that arise like a relative selling a house cheap or starting a small business…
- If your family needs help.
Having a High Balance in a Savings Account is OK! (or in a CD or Treasury bills…)
Once you realize that it’s ok to have cash that is not invested in the market (heavens no!), the next think of where to save. Here are highlights of some of the options available for emergency funds and their attributes:
- Bank savings account – FDIC insured so it’s safe, but carries mediocre to low returns, with no tax benefits.
- Bank CD – FDIC insured (safe), ok returns for cash, and no tax benefits.
- Short term US Treasury Bills – guaranteed by the US Government so it’s safe, offers CD-like returns, and interest is exempt from state income tax.
- Short term municipal bonds – guaranteed by a local government so it may be safe, returns maybe more than a savings account but less than CDs usually, and the interest is usually federal and potentially state tax free.
The key summary point is that you need to have some safe, accessible cash around. And if you have a higher net worth, that cash is often a large enough pile that trying to maximize earnings on it makes sense. Therefore, If your cash pile is big enough, then focusing on the tax benefits does matter. In this case, having a high balance in a savings account may be almost ok. But it’d be better to put that in something more tax-advantaged.
By the way, if you want to make sure you are getting as many advantages you can get, talk with Chris.
Cover photo courtesy of 401kcalculator