Takeaways
- The earlier you start saving and investing, the less you need to save.
- Emergency funds should have at least $1,000 to $3,000.
- Personal finance experts advocate having at least three to six months of expenses saved.
- Investing excess cash into stocks, bonds, and real estate can help increase your wealth.
- Choosing to save in a high-yield savings account is a smart money move.
Your car breaks down. Inflation is rising. The Federal Reserve hikes interest rates again. There are many reasons to start stashing cash in savings accounts to shore up your finances and meet the demands of modern life.
But how much cash should you actually have in your savings account? What is considered too little and perhaps too much? Savings accounts can be incredibly beneficial because they earn interest, and if you know how to choose the best high-yield savings account you can make significant interest income.
Personal finance experts evangelize different savings methods, rates, and timing. The key is to adopt a saving strategy that works for your lifestyle. There is virtually unanimous consent, however, that you should start a savings plan as soon as possible and begin investing to grow your wealth over time.
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How Much Cash Should You Keep in Your Savings Account?
As you titrate the perfect amount of cash to keep in your savings account, it helps to contemplate the order of your savings. Here are a few things to keep in mind.
Start with Your Emergency Fund
The first stop on any savings journey should be to fill your emergency fund. An emergency fund should allow you to cover unforeseen car troubles, medical emergencies, or other immediate cash needs.
Most personal finance experts advocate having at least $1,000 to $3,000 in your emergency fund. This rule of thumb applies to virtually every saver and offers a base layer to your savings plan. And if these numbers seem excessively high, create a budget, and start saving small amounts each month toward your emergency fund. Saving as little as $50 to $100 per month will add up over time.
The good news is that you can grow your emergency fund quickly by using a high-yield savings account.
Fill Up Your Slush Fund
Once you have checked the box on saving your emergency fund, the next savings goal should be to start saving a slush fund that allows you to cover several months of living expenses if you get laid off, have a medical emergency, or fall into financially unstable times.
As a general financial barometer, you want to save at least three to six months of living expenses. Monthly expenses look different for everyone. It is important to track your monthly expenses to get an accurate view of how much to save.
If you are a freelancer, writer, artist, or someone with a volatile income, make sure to account for these personal circumstances in your savings plan. It might be helpful to have a little extra cash saved just in case.
Smart Tip:
Select a budgeting strategy that fits your personality to help you achieve your savings goals. Creating a budget with a dedicated savings line item can alleviate the decision fatigue associated with trying to figure out how much to save each month.
The more you save in your slush fund account, the healthier your financial outlook. By saving six months of living expenses, you can distance yourself from the paycheck-to-paycheck lifestyle and start experiencing mental and financial clarity.
Focus on Long-Term Savings
Once you have filled up your emergency fund and slush fund, you can move on to more fun savings. You can start putting your money to work in investing in stocks, retirement saving plans, saving for your children’s college education, and more.
How much should you save toward your long-term financial goals? That depends on the lifestyle you want and the quality of your long-term financial planning. For a starting point, many financial professionals recommend selecting a spending allocation strategy such as the 50/30/20 budget strategy. This policy says that you should spend 50% of your money on needs, 30% on wants, and 20% on saving, investing, and paying off debt.
This obviously doesn’t work for everyone’s financial situation, but it does serve as a proven template. You can use it as an aspirational beacon to help get your finances under control. Calibrate your spending up or down based on how you prioritize your short-term savings goals.
Use the Best Savings Accounts
- High-Yield Savings Accounts: Consider a high-yield savings account for emergency and slush fund savings. These accounts offer high interest rates to help your funds earn interest income and grow quickly. They also provide flexibility to withdraw funds at any time.
- Certificate of Deposits: Certificate of Deposits, or CDs, can also be a fantastic savings option, depending on your investment horizon. CDs pay an interest rate on your savings and have pre-defined maturity dates, ranging from 1 to 5 years. Make sure you won’t need your cash until your maturity date has passed, or you will have to pay fees to withdraw your funds.
- Roth IRA: Contribute after-tax dollars to a Roth IRA and invest in stocks, bonds, ETFs, or mutual funds to grow your retirement savings.
- Traditional IRA: For long-term retirement savings, Traditional IRAs can be an excellent choice. These accounts can be opened by anyone (who meets predefined IRS criteria) to help save pre-taxed earnings for retirement.
- Employer-Sponsored 401(k) Plan: Some employers offer a 401(k) plan that allows you to contribute pre-tax dollars to a retirement savings account. These plans come with bespoke investment plans and opportunities. Consult your human resources department for more information on how to set up a 401(k) plan.
Explore the best high-yield savings accounts for 2024 and put your capital to work.
Make Savings Personal
Saving to save is no fun at all. Figuring out the right amount of money to save and invest varies from person to person and largely depends on what you want out of life. Some people are prone to save early and spend later, while others focus on enjoying the present. If you feel more financially stable with higher savings, fill up your savings account quickly to enjoy that peace of mind.
Consult with a financial professional if you need help planning how much to save in your emergency fund, slush fund, retirement, and investment accounts. Financial advisors can help you align your life and money goals.
Smart Summary
Savings takes many forms. For beginner savers, starting your emergency fund is absolutely critical to distance yourself from any type of unforeseen financial calamity. Once you have met this goal, climb up the financial ladder even more with a slush fund account to cover several months’ worth of living expenses. From this perch, you can enjoy the benefits of investing for your future and open an online brokerage account. Growing your money in a high-yield savings account from day one is a smart money move.
Frequently Asked Questions
Yes and no. Most accounts let you fund your account with only a couple of dollars and start rewarding you with monthly annual percentage yield (APY) interest payments immediately. Some accounts require a minimum monthly balance. Read more about the best savings accounts.
Interest begins to accrue on the day your bank processes your account. This can be different from your application date. Opening a savings account is easy with a step-by-step guide.
Banks pay interest monthly and will credit your account according to your banks’ policies and specific account details.
Applying for a high-yield savings account is easy. Most banks allow you to apply online or schedule an in-person appointment to meet with a local banker. If you are already opening an account with an existing bank the process will be even faster.
