There is a reason why you need to be careful about keeping too much money in a savings account. Over time, the value of your money may erode if you keep it hidden in your savings. This is because savings accounts don't tend to pay very generous interest.
In fact, even high-yield savings accounts today pay around 0,60% -0,70% interest. That's not much, if you consider that if you invest your money instead, you could get 10 times higher returns and in any case a little lower than the average of the stock market.
While it is clear that a savings account will not make you rich, it is important to keep one open and well-fed at all times. Here because.
You need cash on hand for emergencies
You never know when life can hold the unexpected. You may think your job is safe, but get fired when your company decides to downsize. Or you could get sick or injured and end up with thousands of dollars in medical bills.
Without an emergency fund, you could find yourself in financial trouble in such a scenario and suffer a number of unwanted consequences. But if you have cash reserves to tap into, it will be much easier to get through a financial crisis.
In fact, as a general rule, it's good to set aside enough savings to cover at least three months of essential bills. For added protection, it is best to aim for six months.
Now you might be thinking, "Can't I just invest my money in a brokerage account and tap into it when the need for cash arises?" The answer is that you could, but it might not be the way to go.
You can't rule out the possibility of needing money in a time of emergency, just when your investment portfolio is losing value. In that case, looting your brokerage account would mean blocking guaranteed losses (whereas often, if you leave your portfolio alone during a market downturn, it will bounce back over time and you won't lose a dime).
On the other hand, with a savings account, you never have to worry about losing your capital. If you put $ 10.000 in the bank, your balance will be worth $ 10.000 (more if interest has accrued), regardless of when you need to make a withdrawal.
It's a good idea to invest money in addition to what is necessary for emergencies. But make sure you always keep a modest amount of money in a savings account. This could help you weather the storm next time life holds an unwanted financial surprise.
This does not mean that you have to settle for just any savings rate. Rather, do your research.
If you are not thrilled with the interest your bank pays, check to see if there is a better rate (if you have a traditional bank, you may find that switching to an online bank will give you access to a higher interest rate). In any case, don't let yourself run out of savings, as frustrating as it can be to see the minimum interest you earn on your cash.