How much money one should hold in their savings account?

If you are one of them who is holding too much cash in your savings account then you are losing out on your money. How? Where to use this extra money ??

Realized returns = Saving account return(3-3.5%) - taxes - inflation(6-7%)

So our Realized returns comes out to be - 3 to 4% (Negative)

How much should one ideally have in their savings account?

There is a thumb rule to keep an amount equal to 3-6 months of your expenses in your savings account. Some call it as emergency fund as well as it can be redeemed at any instance.

There are few people who use credit card as an emergency fund option. This is not wrong until you are paying the credit card bill on time, as credit card charge 3-4% monthly on the pending/late amount.

Reasons why people hold big amounts to savings accounts?

1. It gives one sense of accomplishment or happiness seeing so much money in their account. They think they can easily go to bank and withdraw money.
2. Some are too lazy to make an investment
3. They don't understand that over years they are at potential loss

Impact of keeping such amount in savings account

1. According to the laws of economics we have supply of money so the demand automatically get created. Eg - We keep on buying stuff which we don't need, suppose when a sale happens and we end up spending saved money.
2. It is very similar to keeping all eggs in a single basket. Though it will happen very rare, what if a bank goes bankrupt?

How to deal with it?

If you have too much liquid cash in your account below are a few of the ways you use to handle your money.

1. If you can't afford to take a lot of risk, park some portion of your money in some FD/Post office schemes for returns of upto 7-8% over 2-3 years. Generally people who are closer to retirement choose such plans, depending on your risk appetite.
2. If you are in your 20's,30's or 40's you should definitely invest some portion in quality stocks and mutual funds.This is a long term strategy, you should keep it at-least for 5 years.
3. Debt funds/ Government/Corporate bonds - These are kind of safe havens to put your money into for around 3-4 years.
4. According to your needs Keep on rotating money after some regular intervals to enjoy taxation benefits. Eg- moving money from equity to debt and vice versa.

Conclusion

I have mentioned the financial instruments you can use to park extra money but it completely depends on how much allocation you want to do in these, because a person's ability to take risk at 29 is different from one doing it at 55.

But there is one thing i can bet at which is don't keep so much money with your savings account.

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