How Much Should You have in Savings?
There is no single rule for everyone since the amount in a savings account depends on several factors. There are general recommendations, but the amount of money set aside is different for each person.
"Ive savings for a month" is a good start. However, most people need much more. The reality is that people should have at least three accounts:
- savings account;
- emergency fund;
- sinking fund.
A good amount of savings depends on your income. Most people recommend setting aside at least 20% of one's income. For instance, a person who makes $2,000 per month should set aside $400 per month for a savings account.
Another important factor to consider is the goal. If you are not in a hurry and don't have a specific goal, then the answer to the question "how much savings should I have in my account" is fairly simple - set aside 20% of your income.
However, if you want to purchase something or earn interest on your savings, set aside more than 20%. Cut all your unnecessary expenses and set these funds aside. You should also consider an emergency fund and a sinking funds account.
Emergency Fund Account
One more important question than "how much is a good savings account?" is how much should one have in their emergency account? Most people either don't have an emergency account or have less than $1,000.
If you don't have an emergency account but you want one, here are some tips to start:
- Set aside the first $1,000.
- Repay all debts (if you have them) using the debt snowball method. This method requires paying off the smallest debts and proceeding with other debts.
- Keep investing into your emergency fund each month until you have around six months of expenses saved.
Another tip that helps save funds is covering your rent and bills early. As soon as you get your salary, you should pay for utilities, then set aside funds for a savings and emergency account.
Another popular question is, "how much should you have in your bank account?" The answer is simple - enough to cover regular expenses. But what about other things?
Suppose you need a new laptop soon since the current one isn't working properly. How can you buy a new laptop if all your funds go to the savings account, emergency account, covering rent? All you need is a sinking funds account!
It's a fund that you create for a specific purpose. In this case, to buy a new laptop. The "dream" laptop costs $800. Create a sinking account and set aside $200 monthly for four months. As a result, you can still invest in a savings account, cover all bills, and take care of an emergency fund.
A Simple 50/30/20 Rule
50/30/20 is a rule of thumb. Check out the table below to better understand the rule.
It means the person uses 50% of monthly income on expenses. At least 20% should go towards the savings account. Then the person is left with 30% o their income. These funds go towards non-essentials, such as entertainment, recreation, etc.
The key part in the rule is 50% that should go towards regular expenses. You should have enough money to pay your bills, cover essential expenses, etc. If you can spend less on regular expenses, set aside the residual sum for a savings account.
At this point, you should consider your goal. If you don't have a specific goal to buy something or invest somewhere, then you can use the 50/30/20 rule without any changes to the proportion. If you have a specific goal and are determined to reach it sooner, consider cutting expenses, including the non-essential expenses.
So, how much in savings account should people have? You should feel comfortable having enough to cover expenses for at least three months. For example, if you have around $1,500 of regular monthly expenses, you should have $4,500 in your savings account. However, it's recommended to set aside the amount of money equal to six months of expenses.
The statistics claim that people manage to find a new job within the first six months. So, if you lose your job, you won't have to borrow money, making your situation even worse.
You could also keep using the 50/30/20 rule when you have enough money for six months. Just keep your funds in a deposit account with good interest rates so your funds can earn you more money.