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How to know if you’re saving too much

What we'll cover

  • Evaluating your excess funds

  • How to make your money work smarter for you

  • Some options if you are ready to go beyond a savings account

Saving is one of the best money habits we can learn. It’s essential for meeting our financial goals. A lot of us got serious about building up our rainy-day fund over the past few years after the shock of the pandemic. Now, with inflation on the rise, saving has become a bit more challenging and a bit more vital all at once. But when do you know you’ve saved enough?

Everyone’s financial situation is unique, but having the right balance of cash on the sidelines and cash that is working hard for you is important. That doesn’t mean you stop saving, but once you’ve reached a certain threshold, other wealth-building opportunities (like an investment account) could benefit you more in the long run.

How much is enough?

Overzealous saving is a possibility, but with inflation causing many of us to tap into savings to cover higher expenses, having a threshold or goal in mind for your desired level of savings can be helpful. This way, you’ll know when the savings cookie jar can no longer be tapped. Or when you have excess funds that can be used to pursue other financial goals. Your own personal financial goals and needs will determine  how much you should have saved . If you’re unsure, start with these two checkpoints. 

Emergency fund is fully stocked (and in a liquid savings account)

If you’ve already reached or are incredibly close to saving the recommended three-to-six months’ worth of living expenses for your  emergency fund  (or whatever goal makes sense for your lifestyle), it could be time to start thinking about alternatives as you continue to build your savings. 

With your emergency stash maintained in a liquid, accessible account, like the  Ally Bank Online Savings Account, you can earn interest at a competitive rate but still easily access these funds should life throw you a curveball. 

High-interest debts are paid

Saving money and paying back debt is a balancing act, and sometimes one might take priority over the other. Once your emergency fund is in good shape, it might be smart to focus on taking steps to  eliminate some of the debt  you might be carrying. 

Paying off high-interest debt, like that from credit cards, is a good place to start. Balances on these types of accounts accumulate fast and technically make the items you purchase even more expensive. Reducing these balances quickly, means more saving in the long-term. If a portion of your budget was dedicated to building your emergency fund in the past, you might consider diverting some of those funds to paying down your monthly credit cards or loans payments. 

Ready to go beyond the savings account?

Saving money is smart. Knowing the best place to keep your savings is even smarter. Saving “too much” money isn’t really the problem. But saving without a strategy means that your money could be working smarter for you.

Save for your short-term goals

If your emergency savings account is fully funded, it could be a good time to start planning and saving for short-to-mid-term goals, like buying a house or planning a special trip . Since you have more control over the timing of these financial goals, quick access to your money can be less of a priority, which opens the door to a few more tools like certificates of deposits (CDs), money market funds, bond funds and beyond.

CDs are, in some ways, like a savings account, but with key differences. For instance, for a certain period of time (think: three months to five years) your money typically won’t be accessible without a penalty. On the plus side, CDs may offer higher interest rates than regular savings accounts, and your rate typically won’t change for the duration of that specified time period — even if national interest rates change. Locking in an interest rate, can be a good thing, but be cautious given we are in an environment where rates are moving higher. Committing to a CD with a term longer than a year or two means you could miss out on returns if rates move higher.  However, some specialty CDs, like Ally Bank’s Raise Your Rate CD , offer rate increases during the term.

Invest extra emergency funds

Once you’ve built a rock-solid emergency fund and have a savings plan in place for your short-term goals, you may want to explore the next step for what could possibly be greater earning potential: investing.

Investing always involves risk — and if it’s your first time investing, you might feel nervous. But preparing for big goals like retirement or building generational wealth are lofty goals that will likely require a strategy beyond socking money away in a savings account. Fighting inflation and earning compound interest are two important benefits of investing that can help you meet those long-term goals. 

If you’ve shied away from investing in the past or you’re waiting for the  best time to invest , know that starting early is generally better and there are many choices to help suit your unique needs and investment objectives. If not having time is your biggest hold-up, you might consider starting with a robo-advisor to help minimize the guesswork and help you become a  confident investor

Save smarter, not harder

An accessible savings account and emergency fund are only the beginning of a strong approach to your financial health. If you’ve set a solid foundation and cushion, it may be time to think about other solutions. By exploring wealth-building opportunities beyond your savings account — whether you take advantage of higher interest rates or the potential returns of the stock market — you can consider other opportunities for pursuing your goals. 

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