Maintaining sufficient savings is crucial for financial security, providing a safety net for unexpected expenses and a pathway to achieving your financial goals. How much you need in savings depends on your financial situation, but an emergency fund that can cover three to six months of expenses is a good place to start.
Read on to find out how to calculate how much you should have in savings and how much to save each month.
[Read: Best Savings Accounts.]
What Influences Savings
Factors such as income, expenses, debt obligations and lifestyle can influence how much you have in savings. If you have a comfortable income, you might have more disposable income to save. But debt obligations or a spendy lifestyle could limit how much you can save.
If you have a specific goal, such as buying a home or starting a business, you may save more aggressively until you’ve reached your goal.
What You Should Have Saved
Your savings account should have enough to keep you afloat in a financial emergency. Generally, having at least three to six months of living expenses can offer a safety net if you experience job loss or a medical emergency.
For example, if you have monthly expenses of $5,000, aim to save $15,000 to $30,000 in your emergency fund.
“Many just keep enough in their savings account to waive the monthly service fee, while the goal should be to save more than that,” says money coach and certified financial planner Ohan Kayikchyan. “A good starting point is a fully funded emergency fund.”
It is possible to have too much in savings, as funds you don’t need immediate access to could be invested in stocks, bonds or real estate to grow your wealth.
“You always want your money to work for you, and while you may earn a return on money in a savings account, you will likely not earn as much as you could by investing,” says Rosalyn Glenn, a financial planner at Prudential in Columbia, South Carolina.
[See: Best High-Yield Savings Accounts]
How Much to Save Each Month
You can use guidelines to determine how much to save each month. A simple rule of thumb is to save 20% of your income. For example, if you earn $75,000 annually, save about $15,000 per year or $1,250 per month.
Don’t be discouraged if that seems like more than you can save each month. Getting the ball rolling with any amount of savings is helpful — and knowing what you should be saving gives you a goal to work toward.
It might help to see the bigger picture in an income-to-savings ratio. A rule of thumb is to set aside 50% of your income for necessities, 30% for discretionary expenses and 20% for savings.
Checking vs. Savings Amounts
Checking and savings accounts are both bank accounts that allow immediate access to funds. But checking accounts are for everyday expenses and generally have lower, more fluctuating balances than savings accounts.
You should keep enough money in checking to cover your monthly bills with some wiggle room — about a month of expenses. That’s much lower than the three to six months’ worth of expenses you should keep in your savings account for emergencies.
[Read: Best Checking Accounts.]
Growing Your Savings
Want to pad your savings account? Use these strategies to grow your savings:
— Use a budget. A budget can help you see where your money goes and identify unnecessary expenses you can cut to save more.
— Automate savings. Use automatic transfers to shift funds from your paycheck to your savings account, which can reduce the temptation to spend instead of save.
— Set achievable goals. Consider how much you want to save and how much you’ll need to put away monthly to reach that amount.
— Boost your income. Asking for a raise, getting a new higher-paying job or taking on a side hustle can help you funnel more income to savings.
— Manage debt. If debt is getting in the way of your savings goals, prioritize paying off high-interest debt with lower-interest alternatives such as a debt consolidation loan or balance transfer credit card.
Kayikchyan says automation can make saving easier. “It’s all about paying yourself first by saving for your financial goals and priorities, then only after spending whatever is left.”
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How Much Money Should You Have in Savings? originally appeared on usnews.com
Update 07/20/23: This story was published at an earlier date and has been updated with new information.
