I earn 4.00% APY on my savings right now, which is a really good interest rate. I keep about $20,000 in cash for emergencies there, and that earns about $800 per year in interest. Not bad at all!
But beyond that emergency fund, I don’t want to keep too much money in a savings account. At some point, extra cash sitting there actually costs me money instead of making it.
That’s because those same dollars could be working a lot harder if invested long term. Here’s how I split my cash between saving and investing — and why keeping too much in the bank is a mistake.
How much interest a savings account earns
Right now, the national average savings account pays 0.38% APY, according to the FDIC. Top online savings accounts pay upwards of 3.50% to 4.00% instead.
That gap is bigger than it looks. At the 0.38% APY average, a $20,000 balance earns about $76 a year in interest. At my 4.00% rate, that same $20,000 earns roughly $800. It’s the same money at the same risk, but it pays about 10 times more.
So if your cash is still parked at a big bank earning next to nothing, that’s the easiest money you’ll make all year. Compare today’s best high-yield savings accounts and grab a rate that actually pays you.
Where “a lot” turns into “too much”
Even if you’re earning a high interest rate, there’s a point at which excess savings isn’t doing you much good.
A full emergency fund in savings should be between three and six months of essential living expenses. This is cash you need to keep liquid, and you’ll want it earning the highest APY possible to keep up with inflation.
If you have other short-term savings goals (like saving up for a house or car in the next couple years), you should keep that in a savings account, too.
But for any money above that, it’s like your long-term money is stuck in a short-term job. It can grow way bigger if you invest it instead.
Let’s say you’re a supersaver and you’re sitting on an extra $50,000 in savings (congrats, by the way — that’s a huge accomplishment on its own).
Keeping that money in savings feels safe, and it is. But safe money barely keeps up with inflation, so it’s not really growing much at all over the years. If you invest that money instead, that same $50,000 could work a whole lot harder for you.
The S&P 500 has returned nearly 10% a year on average since 1928, according to Motley Fool Money research. Let’s be conservative and assume 8% instead of 10%. Here’s what a spare $50,000 looks like over time, sitting in savings at 4.00% versus invested at 8% annual return.
|
Time |
In Savings (4.00%) |
Invested (8%) |
Difference |
|---|---|---|---|
|
After 10 years |
~$74,000 |
~$107,900 |
~$33,900 |
|
After 20 years |
~$109,600 |
~$233,000 |
~$123,400 |
|
After 30 years |
~$162,200 |
~$503,100 |
~$340,900 |
Data source: Author’s calculations.
The longer the money sits, the wider the gap gets because of compound growth.
What I do with all my savings
My money set-up is pretty simple. I keep my emergency fund in a high-yield savings account earning the highest APY possible. Right now my account pays 4.00%, which is a top rate in 2026.
Everything beyond that goes to investing accounts. I’ve been buying index funds for over 15 years, inside my Roth IRA, workplace 401(k) and regular brokerage account.
There’ve been a few really scary years when the stock market has had massive drops (during the COVID-19 pandemic, for example). But I’ve thankfully never sold anything and my accounts have always fully recovered — and way more. Volatility is part of investing, but if you hold for years and decades, that’s where true wealth is built.
Start by figuring out how much you really need in savings. Add up your emergency fund plus anything you’ll need in the next couple of years, and keep that in a high-APY savings account.
Then take a hard look at what’s left over. If you’ve got a huge balance just sitting idle, that’s the money that could be growing long-term wealth.
Compare the best online stock brokers and put your excess savings to work. The sooner it’s invested, the more time it has to grow.
