Many people wonder How Much Money Should You Keep in a Savings Account. Experts often give different advice, which can be confusing. Should you save six months’ worth of your expenses? Or should you save 20% of each paycheck? The answer depends on who you ask.
Some financial experts and coaches might not give the best advice because they aren’t properly trained or they don’t understand the average person’s financial struggles. As someone with experience in financial counseling, I suggest ignoring “experts” who offer one-size-fits-all solutions. Instead, use these simple guidelines to find what works best for you.
Why Do You Need Money in a Savings Account?
The main reason to keep money in a savings account is for emergencies. Your savings can help you handle unexpected costs and prevent them from becoming crises. Here are some examples of why you might need savings:
- Home Repairs: If something breaks in your home, like the roof or plumbing, it can be expensive to fix.
- Rent Increases: Sometimes, landlords raise the rent, and you’ll need extra money to cover the higher cost.
- Car Breakdowns: Cars can break down unexpectedly, and repairs can be costly.
- Reduced Work Hours: If your employer cuts your hours, you might earn less money and need savings to make up the difference.
- Medical Procedures: You might need a medical procedure that isn’t fully covered by insurance.
- Funeral Travel Expenses: If a loved one passes away, you might need to travel for the funeral.
Ultimately, your savings are there to protect you in case you lose your income. If that happens, your savings can help you pay bills while you look for a new job. Another benefit is that you can withdraw money from a savings account anytime without penalties, unlike some other accounts.
Also read: What Must Happen in Order for an Insurance Company to Make a Payout? Check All That Apply.
How Much Money Should You Keep in Your Savings Account?
The amount you should save depends on your situation and can change over time. Here’s how to decide:
If You Have Debt
If you have high-interest debt, like credit card debt, keep your savings minimal. Focus on paying off the debt to avoid high interest charges. High-interest debt is typically any debt with an APR above 7%. Instead of putting extra cash into a savings account, use it to pay down your debt. This way, you’ll save money on interest.
Also, keep a “cushion” in your checking account to cover your largest monthly expense, like rent, to avoid overdraft fees. Having a cushion is like having a small backup fund that helps ensure your housing payment is covered in a serious emergency.
If Your Income and Expenses Are Stable
If you don’t have high-interest debt, aim to save three to six months’ worth of living expenses. This means saving enough to cover your basic costs like rent, food, and bills for three to six months. Save three months’ worth if:
- Your income is stable and consistent.
- Your expenses are predictable and don’t change much.
- You work in a stable job where you’re unlikely to get laid off.
- You don’t have dependents relying on your income.
With three months’ worth of expenses saved, you can cover your costs for three full months if you lose your income. If you cut back on expenses, your savings will last even longer. Once you save three months’ worth, start putting extra money into accounts that earn more interest, like a retirement account with an employer match.
If Your Income or Expenses Are Unstable
If your income varies or you have unpredictable expenses, focus on saving at least six months’ worth of living expenses. This is important for people like self-employed individuals, gig workers, or seasonal workers. Your savings can help supplement your income during slow periods. Even if it’s hard to save when your income fluctuates, try to put some money aside during good times.
The six-month mark is also good for anyone with unpredictable expenses or major recurring expenses. For example, if you have a chronic medical condition or minor dependents, you’ll need ample savings to cover unexpected costs instead of using credit cards or loans.
If You Have a Big Upcoming Purchase
If you need to save for something big within the next year, add this amount to your savings. This is called a “sinking fund.” Save the money for your big expense in an account where you can withdraw it without penalties. Some reasons to add a sinking fund to your savings account include:
- Home repairs
- Car repairs
- Down payment on a home
- Relocation costs
- Wedding expenses
- Car purchase
- Medical procedures
If your big purchase is further in the future, like one to five years away, consider investing in options that earn more interest than a savings account, like a CD or Treasury bill.
How Can You Save More Money?
Saving money can be challenging, but these tips can help you reach your savings goals:
Automate Your Savings
Set up automatic deposits to your savings account, even if it’s just $25 per paycheck. This way, you won’t forget to save, and your savings will grow over time without you having to think about it.
Review Your Account Statements
Look at your bank and credit card statements to find and cancel unnecessary expenses. For example, you might find subscriptions you don’t use or notice that you spend a lot on eating out. Cutting back on these expenses can help you save more money.
Delete Card Information
Remove your credit card information from online accounts to avoid impulse purchases. This extra step can make you think twice before buying something you don’t really need.
Increase Your Income
Aim to increase your income by asking for a increatment, getting a promotion, or finding a higher-paying good job. Even working a few extra hours can help you save more, but be careful not to burn yourself out.
Talk to a Credit Counselor
Schedule a free appointment with a certified credit counselor to get advice on improving your finances. They can help you create a budget and find ways to save more money.
Cut Big Expenses
Look for major expenses you can reduce or eliminate. For example, if you can temporarily live without a car or move to a cheaper apartment, you’ll save a lot more than by cutting out small expenses like coffee.
Avoid New Cars
New cars lose value quickly. If you drive a well-maintained car past the 200,000-mile mark, you’ll save money and avoid significant depreciation losses.
Use High-Yield Savings Accounts
Put your savings in a high-yield savings account (HYSA) that pays you a competitive interest rate. This way, your savings will grow faster. Check out rankings of the best high-yield savings accounts to find the best options.
Where Should You Keep Your Savings?
Instead of keeping money under your mattress, use an FDIC- or NCUA-insured savings account. Your money will be safe from theft, fire, water, and pests. Plus, it will earn some interest, which helps offset inflation. Look for savings accounts at credit unions or online banks for the best rates.
Can You Have Too Much Money in a Savings Account?
Yes, having too much in a savings account can be a problem. Federal insurance only covers up to $250,000 per depositor, per institution. If you have more than $250,000 in one account, some of your money could be at risk if the bank fails.
Once you have enough to cover three to six months’ worth of living expenses, consider moving extra money to accounts that earn more interest, like CDs or 401(k)s. This way, your money will grow faster and outpace inflation.
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Conclusion
Knowing how much to save in a savings account can be tricky, but it’s important for your financial stability. Focus on your personal situation to decide how much to save. If you have high-interest debt, prioritize paying it off. If your income and expenses are stable, aim for three to six months’ worth of living expenses. If your income or expenses are unpredictable, save at least six months’ worth. For big upcoming purchases, add a sinking fund to your savings.
By following these guidelines and using the tips to save more money, you can build a strong financial safety net and be prepared for whatever life throws your way.