How Much Money Should You Keep in a Savings Account?
Your savings account may be the go-to for accumulating wealth and putting away money for the future. But how much money should you keep in your account?
It’s a compelling question, since the more wealth you have, the more financially secure you can be. A savings account keeps your money safe and secure, but what if you wanted to invest in other things, save for other things, or simply spend it? Putting all your dollars in one savings account is putting all your eggs into one basket.
Likewise, if you don’t have enough saved up, your account sits there, relatively empty, and you’ve got few dollars to fall back on. So how do you determine how much to save, and how much goes into your trusty interest-bearing savings account?
Start by identifying for certain financial goals and needs, building up your savings, and devoting your savings account as the destination. Here are some baseline savings target to hit for your savings account.
A Note Before Beginning
Building a savings plan for the money in your savings account won’t be the same for everyone. We’re all in a unique financial situation, with different savings goals from one person to the next, so look at these general guidelines as a starting point; from there, you can modify your savings account deposits for your own individual needs.
Saving for an Emergency Fund
You’re laid off from your job. Your car needs major repairs. Your fridge is on the fritz. You encumber a surprise medical emergency, or your pet needs to make an unplanned visit to the vet. And you don’t have the cash to cover the costs.
That’s why an emergency fund is so important to have, a cash reserve that helps you pay for unexpected expenses, to help you survive and pay your bills without going into debt.
How much you need in your emergency fund depends entirely on your income and your cost of living. Some sources maintain that the bare minimum you need saved up is two weeks’ worth of expenses, but a more conservative, careful approach is to sock away between three to six months of your monthly living expenses in your emergency fund (ideally part of your savings account). Think of it like unemployment insurance: if something unforeseen happens, the money is meant to keep you afloat until you can get back on your feet financially again.
Say your monthly expenses come out to about $1,850:
- Rent: $850
- Car payment: $200
- Car insurance: $100
- Groceries: $200
- Utilities: $100
- Student loan repayment: $200
- Cable/Internet/cell phone: $100
- Other miscellaneous expenses: $100
Multiplying those numbers, your average emergency fund would range between $5,550 (three months’ worth of expenses) and $11,100 (six months’ worth). For an even better cushion, 12 months of living expenses makes the best emergency fund. So if six months is your target amount, and your savings account includes $20,000 total, $11,100 of it should only go towards emergency purposes.
In a nutshell: Hold the equivalent of 3-6 months worth of living expenses. If you can or if you prefer a bigger financial buffer, increase that to 12 months worth of living expenses.
Saving for a Home Down Payment
Mortgages payments can get pricey, but down payments are downright daunting. Once you settle into the groove of repaying a fixed monthly home loan, you know what to expect over 10, 15, 30 years.
But your initial down payment? That’s a huge chunk of cash you must save up, since the larger your down payment, the lower your monthly payments (and interest) will be in the long run. It’s important to have that down payment ready if you’re eyeing up a new house to buy, and your savings account, ideally, is a good place to start building it.
Depends on the home price and type of home loan
Generally, for a standard, fixed loan, you’ll need a down payment of about 3% to 20% of the home’s value; so, if a property is $250,000, your down payment would be anywhere from $7,500 to $50,000. For jumbo loans and large mortgages, a 10% down payment is acceptable.
However, keep in mind that down payments under 20% almost always require you, the prospective buyer, to pay for private mortgage insurance, or PMI. It’s assumed that buyers who can’t afford at least a 20% down payment may be more likely to default on the loan, so PMI ensures the seller recoups all their money.
So, to avoid paying PMI, it’s important that you have your down payment ready -- and saved up on full -- before taking out a mortgage. To be on the safe side, aim for that 20%, where your savings account is one place to start saving for it.
In a nutshell: Keep at least 20% of your anticipated home price range.
Saving Up for General Needs
When it comes to all-purpose, everyday savings, it’s not a matter of how much to keep in your savings account -- since more is always better -- but a matter of how much to save on a regular basis.
Look at this as variable or loose savings target. Whereas your emergency fund or home down payment (or other target goal, like a car down payment, retirement fund or big ticket expense) are often fixed amounts, your regular savings, whether it’s for a rainy day or just for general purposes, can be as much as you can afford. You could try targeting 5% of your monthly income, but if that’s too much, scale it back to 3%, or increase it if you can.
Save as much as you feel comfortable saving, or as much as your income or budget permits. (For instance, if you got a raise at work, it affords you to save more money. Or, if you were to reduce some of your revolving expenses, and put the savings into your general account.)
In a nutshell: There's no right amount here. Continue to set aside 5% of your monthly income as a start. Adjust accordingly (ideally, increase this percentage when you can).
Don’t Doubt Your Debt
It’s good to have a rainy day fund or general, accessible liquid cash on hand in your savings account. However, don't forget about paying off debt with much higher interest rates than any savings account would ever accrue.
Then there’s money you’d like to invest. Savings accounts are ideal for keeping cash that you'll need in the short term. For long-term savings, an IRA or employer-sponsored 401(k) would offer the potential for higher returns, and better yields. It's important to have both types of savings.
Generally, this is how one should prioritize their finances:
- Build an emergency fund.
- Contribute to your company's retirement plan for a match.
- Pay down high-interest debt.
- Put more in savings and/or contribute more to retirement plans.
In a nutshell: Make sure you have an emergency fund and contribute to get your company's match. Then, pay off high interest debt before beefing up your savings and investments.
Remember FDIC Insurance
Accumulating a large balance in a savings account is a commendable accomplishment. But, it is also very important that you're aware of the deposit insurance limits.
The FDIC is the Federal Deposit Insurance Corporation, and it offers FDIC deposit insurance, special coverage for every single deposit account in the U.S. up to $250,000. So, if you have a bank balance anywhere up to that amount and your bank goes out of business, the FDIC will send you a check for the total insured amount.
Spread your savings
If you keep money in excess of these limits, there's no guarantee that you'll get your money back. Such a situation is very rare and may never happen to you. However, it's better to be safe.
Let's say you use your savings account for all the reasons we’ve just mention (your emergency fund, a mortgage down payment, etc.), and you’ve got more than $250,000 -- $400,000, in this case. If your bank goes under, the FDIC will only insure up to $250,000 while the other $150,000 may never be returned to you.
In this case, it might be better to split up your funds, diversifying across multiple savings accounts.
Saving Consistently is Key
Worrying about how much to keep in your savings account a good thing. It means you care about saving money and want your deposits to go as far as they can. And even the most basic savings account with a nominal interest rate is better than stuffing your money under the mattress -- or not saving at all.
Instead of wondering how much to put into your account, just save as much as you can. No right number applies to every person, since financial circumstances are a lot like fingerprints -- hardly anybody has the same ones.
Follow some of the above pointers and use our key numbers as starting points. Remember the limitations to using a standard savings package, especially when it comes to huge balances that could put your money at a disadvantage, or worse, a risky place.
Once you’ve built up a healthy nest egg for a variety of needs, targets and goals, consider consulting a financial planner to broaden your savings horizons. They can best suggest other avenues to take to grow your wealth. But, always keep your savings account open and active. After all, it’s the template and the blueprint upon which your finances are built.