Money Minute: Is it possible to save too much?

Most experts recommend saving at least 6 months’ worth of living expenses -- however much it would take you need to keep a roof over your head, food on the table and your bills paid if you find yourself in a financial bind.

Because this cash needs to be easily accessible in an emergency, the best place for it is a basic savings account. Savings accounts are great for rainy day funds, as well as expenses that have a 5-year timeline or less, like a wedding, a big vacation, or the birth of a child.

Money put away toward long-term goals like retirement doesn’t belong in a savings account.

The reason? Inflation. Interest rates are so low on savings accounts these days that your money won’t be able to keep pace with inflation.The average bank savings rate is 0.49% these days, according to Bankrate.com. With inflation currently at around 1.8%, that means your money is losing value.

You’ve got a much better chance at protecting your savings against inflation by investing in a broadly diversified, low-cost index fund ortarget-date fund in a tax-advantaged vehicle like a 401(k) or IRA.

For example, take Mallory. She’s 32 and saves $200 a month until she finally has enough to cover six months of expenses. Her savings account has a 0.01% interest rate. If Mallory decides to keep contributing $200 a month to this account, by the time she’s 65, her balance will be just $79,532.

Now, let’s say she stops saving in a regular savings account after she hits her savings goal. She starts putting $200 a month in a retirement fund. By age 65, assuming her investment earns a 6% return annually, she would have $242,517 by age 65 — three times as much as a regular savings account.