How Much Money Should I Keep in My Savings Account?

Saving money is one of the most responsible things that you can do, not only for your own future but in the event of a financial emergency.

According to research published by a financial company called Empower, nearly 40% of Americans cannot afford a financial emergency costing more than $400. The same study claims that 21% of Americans acknowledge that they don’t have any savings at all.

Having money set aside, particularly in a savings account, is one of the most important aspects of money management.

Whether you’re budgeting for a trip or a major purchase, or you want to be able to handle a random appliance breaking down in your house without having to put more on your credit card, saving money is crucial for people who want to get better at money management.

However, many people ask, “How much money should I save?” In a time when many things are as expensive as they’ve ever been, it’s difficult to save money or even know how much you should be putting in a savings account.

However, savings accounts not only allow you to have money designated for unexpected costs, but they also generate interest, albeit not at very high rates.

Today, find out more about how much money you should be saving and how some relatively minor changes in your current spending habits can help position yourself for long-term financial success.

Why You Need a Savings Account

Before we dive into how much money you need to be putting into a savings account and how you can start budgeting for it, let’s get a better understanding of why you need a savings account.

Ultimately, a savings account’s primary purpose is to serve as an emergency fund. Most people don’t use their savings account to save up for a car or a down payment on a home.

Instead, they’re usually used to pay for a nice vacation or unexpected financial emergencies.

Hypothetically speaking, let’s assume that your refrigerator just stopped working today. Based on national averages, a basic refrigerator costs around $600.

Nearly 40% of Americans would not be able to afford such an emergency, which means you would either need to find a used refrigerator that someone was getting rid of or put the cost on a credit card. Using a credit card can turn that $600 fridge into a $1,000 refrigerator quicker than you realize.

With this in mind, it’s a good idea to try to build up an emergency fund as quickly as possible.

In most cases, aiming for $1,000 is a great starting point. You can get a new battery for your car, a new refrigerator, or a very basic washer or dryer for less than a thousand dollars, so some of the most common types of financial emergencies can be handled if you have that amount on standby.

There’s definitely nothing wrong with putting money in a savings account because you want to spend it on something fun. However, fun should come after you have a buffer between yourself and a financial emergency.

Consider Your Monthly Expenses

Once you have a $1,000 emergency fund in your savings account, it’s not time to stop saving. Financial experts agree that you should try to put between three and six months' worth of expenses in a savings account.

Obviously, this isn’t the kind of thing that most people can do quickly. Life is expensive, and it’s getting even costlier. However, having enough in a savings account to cover yourself for three to six months is a great way to protect yourself against an unexpected job loss.

In order to do this, sit down and break your monthly expenditures into two categories. First, your fixed expenses are those that don’t change at all from one month to the next, at least not significantly.

Your rent or mortgage, car payment, insurance premiums, loan payments, and utilities are all fixed expenses. Even if a utility bill changes slightly, they’re always pretty close to the same amount.

Once you have your fixed expenses figured out, account for your variable expenses. This includes gas for your vehicle, groceries, dining out, entertainment, and other areas that you may be able to cut back on if you need to.

When you’re establishing a baseline amount for your monthly expenses, don’t forget about any annual expenses that you deal with.

Property taxes, holiday spending, and other annual costs can be calculated and divided by 12 to assign a monthly value to them. After you have these numbers in place, multiply your monthly expenses by three and then by six and try to start saving up that amount.

Think About Your Income Stability

When devising a strategy for saving money, you’ll need to consider your income stability. People with a steady, stable income may be able to put less toward their emergency fund than people whose hours at work fluctuate, or those who rely heavily on sales commissions and bonuses. Your average gross pay isn’t the only factor that you’ll need to think about, though.

In addition to your income stability, take a moment and think about the company you work for and the industry that you work in.

If you work for a family-owned restaurant that has only existed for a couple of years, it’s much more likely that you may deal with a layoff due to the business shutting down than you would if you were working in a high-demand field like computer sciences for a multi-billion-dollar corporation.

A long history with a major company also means that you may be able to get by with a three-month buffer instead of six, as you’ll have an easier time getting a job somewhere else.

It’s also worth noting here that if you’re self-employed, you should try to build up a savings account that has enough to cover up to a year’s worth of expenses. This isn’t easy, but self-employed people, especially those whose businesses are in their infancy, tend to not pay themselves as much or as often.

Planning for the Future

Once you have an emergency fund in place, and you’ve also accounted for some short-term goals, it’s time to start thinking about the future. Your savings account is a great way to consistently put money toward something that may be five or 10 years in the future.

For instance, if you plan to stop renting and purchase your first home in the future, or you’re planning to start a family and will need a larger home, using your savings account to build a down payment is a great idea.

It may seem like a far-fetched idea, think about what would happen if you were able to save $200 each month. That would be $2,400 per year, and over the course of a decade, you would have $24,000 for a down payment.

Everything that you do with your money should be done with purpose. When you spend money, you spend it for a reason. The same is true when it comes to saving. Spend some time evaluating your goals for the short-and-long-term.

As time goes on, those goals will probably change and so will the amount of money that you have available to put toward them. The savings strategy that you use now may not be the same strategy that applies a year from now, but planning for the future is paramount.

Start Saving, Stop Stressing

Ultimately, the goal of your savings account is to help you experience less financial stress. The way that you choose to build this account largely depends on your goals, your income, and how consistently you’re able to put money into the account.

Saving money isn’t always easy, especially if you have a history of frivolous spending. However, it’s worth it to know that you have access to the cash you need when you need it.