Expert Warns This Common Savings Habit Could Be Costing You More Than You Think

It starts for many with that piggy bank a grandparent gave you for your third birthday. The saving habit became ingrained from there, and is one of the reasons personal savings in the U.S. added up to $1.01 trillion in January 2025, according to the Bureau of Economic Analysis.

It begs asking, however: How much should you be squeezing out of your paychecks? How much is too much?

The Role of Cash in a Financial Plan

Keeping additional cash on hand provides a buffer that can reduce the stress of account balances nearing zero before your next paycheck arrives. One of the first steps to building a surplus of cash is to pay down personal debt. Instead of paying interest on that debt, you can be earning interest on your extra cash on hand.

You also might want to use some cash to prepay inevitable expenses, such as insurance premiums for the year. Take them off the horizon so you don’t have to worry about them or deal with them later.

Options for Saving That Cash

Your accumulating cash can sit in a good, old-fashioned savings account from which money can be easily accessed or transferred electronically. You might want to consider a high-yield savings account that pays a more generous interest rate, but be warned: These accounts often come with a limit on how many withdrawals you can take over a cited period. Of course, that could be a good thing. Your intention is to save, after all.

Certificates of deposit (CDs) can be an option if you’re reasonably sure that you’re not going to have to tap into the funds for a while. They offer superior interest rates, but they come with maturity dates. You’ll be hit with a cash penalty if you have to access the money before that time.

How Much Cash Should You Save?

You’d be hard-pressed to find a financial professional who doesn’t recommend stashing an emergency fund to hedge against hardships that life inevitably will throw your way, such as job loss or illness. But how much cash is too much? The magic number is typically three to six months’ worth of living expenses. Think $10,500 to $21,000 if your must-pay monthly expenses are $3,500. You can then make ends meet for this long without taking in another dime.

Your personal circumstances can affect just how many months you’ll want to and might need to cover, however. How stable is your income? Do you freelance, or is your job one that depends heavily on the season? You might find that you have to dip into your savings more frequently in these cases, so you may want to strive for a nine- or 12-month cushion. Three months might be just fine, however, if you’re single with no dependents.

Signs You’re Holding Too Much in Cash

Inflation can erode the purchasing power of cash over time, so it is risky to have too much sitting idle for too long, according to Carson Odom, CPA, CFP, CDFA, and wealth advisor at Adams Wealth Partners.

“If you find that your savings account balance far exceeds your monthly living expenses—say you’ve got two years of expenses in cash—then you’re probably over-allocated,” Odom said. “Another red flag is if you’re holding cash for goals that are five-plus years away, such as retirement or college funding. Your money could likely be working harder in investments aligned with your timeline in these cases.”

When Holding More Cash Might Make Sense

Ameriprise Financial suggests going above and beyond just that emergency savings fund if certain circumstances apply. Are you the only earner in your household? You might want to hold a little more in savings. Are you retired? You’re probably not going to want to go out and scare up a job if you suffer a financial emergency.

“If you’re planning to buy a home within the next 12 to 24 months, if you’re about to retire and want a ‘cash bucket’ to weather market volatility, or if you simply sleep better knowing that you have extra liquidity, then holding more cash is valid,” Odom said. “The amount of cash you hold should always reflect both your financial plan and your comfort level with risk.”

What to Do With Extra Savings

Consider contributing up to 10% to 15% of your pre-tax income per year to retirement accounts such as an IRA or a 401(k) after you have that emergency fund in place. You’ll thank yourself later. Fidelity suggests investing in disability insurance as well to stretch your emergency fund a little longer in case that type of worst-case scenario arises.

“Direct excess cash toward higher-yielding opportunities when your emergency fund is topped off,” Odom said. “That might mean investing in a diversified portfolio or even setting up a donor-advised fund if charitable giving is a priority. The key is matching dollars to your goals and timeframe, not letting them sit idle.”

The Bottom Line

Life doesn’t have to be a constant, grueling trudge toward a financial finish line. Plenty of experts also recommend taking care of yourself, too. Yes, establish that emergency fund. Segue to contributing more to your retirement plans when your fund has reached your goal. But don’t neglect to take that mini vacation, too. Remind yourself why you’re saving: to enjoy life to the fullest.