With a savings account, you can tuck some of your money away for a future emergency expense or a specific financial goal, such as a much-needed vacation or a child’s college education. In addition, savings accounts — especially high-yield savings accounts — put your money to work for you by letting you earn interest on your deposits.
But how much money should you keep in your savings account?
Here are some guidelines and tips for meeting your savings goal.
How Much Should I Have In Savings?
Unfortunately, there's no easy one-size-fits-all answer. The amount you should — or can — save depends on a variety of questions. How much income do you earn? How much debt do you owe? And what are your monthly regular expenses. All these and more should play a role in determining your unique answer.
For example, if you don't have a particularly high income and find yourself living paycheck to paycheck, any money you can set aside in your savings account — even $20 per month — is better than not saving at all. In addition, if you have a large amount of high-interest debt, such as from a credit card, you may want to focus on paying your debt off before aiming for a savings goal. Otherwise, you're likely losing a lot of money to interest payments.
On the other hand, if you enjoy a relatively high income but maintain a relatively modest lifestyle, you can afford to save more aggressively.
In addition, your savings goals should play a large part in determining how much money you should have in a savings account. You may want to save a larger amount of money for an emergency fund than for a planned vacation, for example.
Your First Savings Goal: An Emergency Fund
As soon as you're able, you should consider opening a savings account specifically as an emergency fund.
A good rule of thumb is to have three to six months' worth of expenses tucked away in a savings account as an emergency fund. That way, if you lose your job or face an unexpected expense — Such as a large medical bill, a major appliance replacement, or a pricey car repair — you won't resort to a high-interest credit card account to pay the expense.
To learn how much your expenses are:
- Consult your monthly bank statement or look through a month's worth of debits using your bank's website or mobile app.
- List all your monthly essential expenses, such as rent or mortgage payments, insurance costs, utility bills, grocery spending, gas purchases, etc. Don't include discretionary expenses that you would skip during a financial emergency, such as movie tickets or dining out.
- Once you know your monthly expenses, multiply this number by three. This amount should be the minimum savings you should have for your emergency fund. Multiply your monthly expenses by six to give yourself even more breathing room.
For example, if your monthly expenses were $4,000, you should try to set aside a total of $12,000 to $24,000 for your emergency fund.
Once your emergency fund is established, then focus on saving for other goals. Consider opening a second savings account to separate your "general" savings from your emergency fund.
Determine Your Monthly Savings Goal
Once you know how much money to put into your emergency fund or earmark for another upcoming expense, determine a monthly savings goal. By focusing on a monthly target, saving can feel less overwhelming and far more attainable than just trying to reach a large budgetary goal that is potentially months and months away.
A commonly recommended spending strategy is the 50/30/20 rule[1]. With this rule, you aim to:
- Use 50 percent of your income on essential expenses (housing, food, utility bills, etc.)
- Apply 30 percent or less of your income on "wants."
- Put 20 percent of your income away in a savings account
This means, if you earn $5,000 per month, your monthly savings goal would be $1,000. You'd also earmark $2,500 for all your bills and use some of the leftover $1,500 on discretionary spending, such as restaurant meals, new clothes, movie tickets, etc.
However, if you spend less than $1,500 per month on non-essentials, you can always boost your savings with what's left over.
And if 20 percent of your monthly income is more than you can afford to save, don’t feel bad. Instead, start saving what’s possible and increase those savings as your budget allows. By regularly reviewing and revamping your budget, you may find that you can save even more money than you originally thought.
Tips For Staying On Track
If you're new to adding savings to your monthly budget, it can be easy to fall off track. Here are some tips for keeping your savings habit consistent.
Start Small
It's easy to get overwhelmed thinking how much money you need to save over the long run. To counter that, set an easily attainable monthly savings goal. This prevents you from getting frustrated and giving up.
If the 50/30/20 rule seems a bit daunting right now, remember every bit saved helps. You can always reassess your budget and save more later.
Treat Your Monthly Savings Like A Bill
To help you get in the habit of contributing to your savings every month, think of it as a bill. That is, add your monthly savings goal to your list of essential expenses. If you make savings as much a priority as your electric bill or mortgage payment, it becomes harder to skip a month or forget about saving altogether.
Many banks allow customers to set up automatic recurring transfers from a checking to a savings account. Consider taking advantage of this feature and having a portion of each paycheck go directly into a savings account — the way you would set up an automatic utility bill payment.
Start A Budgeting Habit
While making savings part of your regular routine, you should pay just as much attention to budgeting. By creating — and sticking to — a budget, you enjoy better control over how much you save and spend. In addition, by ongoing review and revision of your budget, you'll likely find ways to trim expenses and add more money to your monthly savings instead.
There are numerous methods for budgeting. Here are some popular budget techniques for beginners:
- The 50/30/20 rule: As previously discussed, allocate 50 percent of every paycheck to your essential bills, 30 percent to discretionary spending (your "wants"), and 20 percent to your savings account.
- The envelope method: With this popular savings technique, you create several envelopes — physically or metaphorically (with a spreadsheet) — into which you divide your income. You have an envelope for bills, an envelope for food costs, an envelope for savings, etc. This keeps you from dipping into one envelope category when you run out of money in another.
- The zero-based budget: Calculate all your expenses (including your monthly savings target) and divide your paycheck to cover all of them. You should have no money left over, meaning that any unassigned cash goes directly into your savings account.
Contribute to A 401(k) Retirement Plan
When you're in your 20s or 30s, retirement seems a long way away. However, the earlier you begin, the more your 50- or 60-year-old self will thank you.
Many employers offer a 401(k) savings account, intended to help employees save for retirement, with funds being automatically transferred from your paycheck to your retirement account. You can start saving with as little as 1% of your pay.
In addition, some employers also offer to match your 401(k) contributions up to a specified limit. This means, for every dollar that you contribute to this savings account, your employer will pitch in as much as a dollar too, up to a determined percentage of your salary.
How To Maximize Your Savings
Apart from trimming unnecessary costs, you can boost your savings by choosing the right kind of savings account for your needs. Here are some popular products for meeting your savings goals:
Traditional Savings Accounts
These basic savings accounts may not earn you the highest interest rates, but they typically have lower barriers to entry than some of the other account types on this list. Many savings accounts are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per account ownership category, per bank[2]. Typically, you can make up to six monthly withdrawals from your savings account without being penalized with a fee.
High Yield Savings Accounts
These savings accounts may have stricter requirements, such as a larger minimum deposit amount, but they pay more in interest on deposits than traditional savings accounts. As with traditional savings accounts, high-yield savings accounts are generally FDIC-insured and come with six monthly fee-free withdrawals.
Money Market Accounts
Typically, these savings accounts pay more in interest than traditional savings accounts, and they are also FDIC-insured. Your bank's money market account may even include a set of paper checks for up to six transactions per month without paying a fee.
With many money market accounts, the amount of interest you earn is tiered, meaning the higher the balance you keep in the account, the better the interest payout rate you'll earn.
However, typically, money markets have higher required minimum deposits than traditional savings accounts. In addition, your bank may charge a monthly fee for having one of these accounts.
Certificates Of Deposit
Certificates of deposit (CDs) are popular savings instruments in which you agree to leave your money in the account for a set period. Your funds will earn interest as you wait for your CD to "mature." Maturity terms can range from one month to several years. If you need to withdraw your money before the maturity date, your bank will likely charge a penalty fee.
As with the other account types on this list, CDs are generally FDIC-insured.
The Bottom Line
Having a savings account can be a lifesaver in the case of an emergency — or be a handy way to save for your dream vacation or another major upcoming expense. By knowing how much money you should have in your savings account, you can create and stick to an effective budget and reach your financial goals before you know it.
