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Wealth Column: How much savings is too much?

The saying "a penny saved is a penny earned" rings true for most Americans.

So few have enough savings to handle unforeseen circumstances like medical bills, layoffs or divorce. Preparing for the unexpected is a big part of financial planning.

But, believe it or not, there is such a thing as saving too much. You want your money to work for you—not to sit in a savings account earning pennies on the thousands.

So how do you know when you've saved enough?

There is no simple answer. Many experts recommend having sufficient savings to cover six or even nine months of living expenses. While that's true for many people, it all depends on your situation: your assets, portfolio, liquidity, risk tolerance and goals.

Understanding the opportunity cost

Money stashed in savings isn't earning interest, at least not enough to make a difference in most cases. The average savings account offers 0.09% APY (annual percentage yield). That means if you deposit $10,000 in savings, you'll earn only $9.00 in a year. Some online banks and money market accounts offer slightly better rates, but still, savings accounts aren't investment vehicles. By letting too much money sit idle, you're missing out on much

higher potential yields.

Making smart financial decisions

Some wise investment decisions require cash up front, which might involve tapping into your savings. For example, maybe it's worth putting a bigger down payment on your house to avoid PMI (private mortgage insurance). Even though your savings may be temporarily reduced, you'll end up saving thousands in the long run.

What about retirement?

We often hear that most Americans aren't coming close to hitting their savings goals for retirement. According to a recent study by the Stanford Center on Longevity, the majority of American workers are not on track to retire at age 65.

However, as with emergency savings, it is possible to save too much for retirement. Retirement is just one financial goal—albeit an important one—among many. You may also be looking to buy a house, invest in a business, pay down debt or any number of other laudable goals.

As another saying goes, you shouldn't put too many eggs in one basket. Retirement accounts are difficult to access early should the need arise. And early withdrawals often come with big penalties. So saving too much can end up backfiring.

What's more, you shouldn't make your life miserable now just to meet some formula for the future. After all, tomorrow isn't guaranteed.

The ideal savings plan is a personalized one

Here's the takeaway: There is no one-size-fits-all breakdown for the ideal savings. It's a highly personalized decision and one that should be made in consultation with a financial adviser who understands your unique situation. We recommend talking to your financial adviser to ensure you're saving enough for the future, while still finding ways to enjoy your earnings today.

The opinions voiced in this material are for general information could only and are not intended to provide specific advice or recommendations for any individuals.

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