How much money should you keep in a savings account?

What is the “right” amount of money to have in a savings account? If you follow the experts’ recommendations, you will probably get confused. Is that six months of your expenses? Twenty percent of every paycheck? Or some other magical figure? The answer depends on who you ask.

Sometimes so-called financial experts, gurus and coaches offer conflicting or just plain bad advice because they are not trained professionals and/or are not really in touch with the average person’s financial challenges.

As a former NFCC-certified credit counselor – someone who has advised thousands of families during budget crises – I strongly suggest ignoring any “expert” offering a comprehensive solution. Instead, you can use the guidelines below to help you find a solution that suits your situation.

Why do you need money in a savings account?

The main reason to keep money in a savings account is. Or, more accurately, your savings help prevent a difficult event from becoming an emergency. For example, any of the following expenses could develop into a crisis if you don’t have enough savings to cover them:

Ultimately, the money in your savings account is there to protect you in a worst-case scenario: the complete loss of your income. If this happens, your savings can act as a form of income replacement, giving you time to find a new job or make other arrangements without falling behind on bills.

As an added benefit, you can do this at almost any time without incurring penalties or losses, which is not the case with money in a retirement account (CD) or the stock market.

How much money should I keep in my savings account?

The ideal amount of savings depends on your situation and can change depending on your circumstances. Here’s how to determine the amount needed:

If you are in debt…

If you have high-interest debt, i.e. debt with an APR above 7% (think:), your savings account balance should be kept to a minimum.

This may seem counterintuitive. However, instead of putting your extra money into a savings account or retirement fund, you’ll want to do so aggressively to avoid losing money in monthly interest.

It is also advisable, which means a limited amount of funds that you never plan to spend. Having a cushion equal to your biggest monthly expense—usually rent or mortgage payments—helps you avoid expensive overdraft fees and serves as a backup to 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, try keeping three to six months of your living expenses (not your income) in a savings account. Yes, it’s a wide range, but it’s relatively easy to figure out which goal you should aim for.

Three months of living expenses are sufficient if you are unlikely to face long-term unemployment or major, unexpected expenses. Aim to save about three months of expenses if all of the following apply to you:

• Your income is consistent and stable.

• Your expenses are largely predictable.

• You work in a moderate to high demand profession.

• You have no dependents.

With three months of expenses saved, you’ll be able to cover all your regular costs for three full months in the unlikely (but still possible) event of a total loss of income. In fact, if you cut expenses, the money will last even longer.

Once you reach your three-month goal, you’ll want to start depositing your extra money into an account where it may not be as accessible, but will earn more interest. An employer-sponsored retirement account with employer matching is an excellent option.

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If your income or expenses are inconsistent…

Not sure how much money you’ll earn each pay period? It’s best if you aim to save at least six months worth of living expenses.

For self-employed individuals, temporary workers or seasonal workers, their savings will act as a supplement to their income during periods of low activity. Yes, it’s hard to save money when your income fluctuates, but one way to boost your savings is to put away some money consistently during times of abundance.

The six-month mark is also a good goal for those who have unpredictable expenses or large recurring expenses. For example, if you have a chronic medical condition or have minor dependents, you’ll need an ample savings balance to help you cover the unexpected rather than turning to credit cards or loans.

If you have a future purchase…

Depositing more than six months of living expenses into a savings account can be counterproductive. You’ll earn a lot more interest when you put that money in a retirement account, a mutual fund, or even a savings account.

However, if you’re preparing for a major expense next year, you might want to save the money for that expense in an account where you can withdraw it without any penalties when the time comes. In this case, you can add a certain amount of money for your next purchase, also known as “,” to your savings balance.

Some reasons to add a sinking fund to your savings account:

• Home repair

• Car repair

• Down payment on a house

• Change

• Marriage

• Car purchase

• Medical procedure

If your big purchase is further away — say, one to five years — you may want to invest in an asset that earns more interest than a savings account, such as a CD or a Treasury bill that matures on the date you need it. of the money .

How can I save more money?

Unfortunately, the more unstable your situation, the more you will benefit from saving a lot of money. If you’re not sure how to reach your recommended savings goals, use these tips that have helped many of my counseling clients in the past:

• Automate: Make sure part of every paycheck goes toward your savings by setting up an automatic deposit into your savings account, even if it’s initially just $25 per check.

• Review your : Review your bank and credit card statements to see if there are recurring charges you can cancel and to identify bad spending habits. For example, eating out is an often unnecessary expense and has increased by 6% due to inflation in the last year.

• Delete your card information: Delete your credit card information from online retail accounts or simply cancel subscriptions from your account.

• Work for income growth: Working more hours means making more money, but it can also wear you down. A better strategy is to set a goal of increasing your pay rate every year through a pay raise, a promotion, finding a new job, or otherwise.

• Talk to a Credit Counselor: Schedule a free consultation with a to explore strategies and resources to improve your finances.

• Grow: Cutting small expenses (like lattes) won’t get you as far as cutting larger expenses. Look for large charges that you can temporarily eliminate or replace with more affordable alternatives.

• Abandon the new car: Most well-maintained cars can now be driven past the 200,000 mile mark. You’ll save a lot and avoid significant depreciation losses if you avoid buying new cars.

• Look for high APY: Put your savings into a (HYSA) that pays you a competitive rate. Check out our ranking.

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Where should I store my savings?

Sure, you can keep your money under your mattress, but a savings account is a better choice.

When you put your money in a savings account, your money is protected from theft, fire, water, and pest damage. Additionally, it may earn some interest, which helps offset the impact of inflation. To get the highest rates on your deposits, look for a savings account at or.

Can you have too much money in a savings account?

Saving money is one of the keys to financial stability, but there is a lot of money in savings accounts.

For one, federal insurance protects your deposits up to $250,000 per depositor, per institution. If you have a savings account with a savings account, some of your money could be at risk if your financial institution fails.

Plus, if you have enough to cover three to six months’ living expenses, the only reason to keep more in a savings account is for a specific purchase you’ll make in the near future, like a down payment on a house. If that’s not the case, you should move your excess funds somewhere where they can earn more interest and beat inflation, like a CD or a 401(k).

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