Saving is one of the fundamentals of long-term financial success. The real question, though, is how much should you put into your savings account?
There’s no one right answer. How much you set aside depends on a number of factors, including your income, current expenses and other circumstances. As you try to figure out how much money you should have in your savings account, here are a few things to keep in mind.
Determine how much to put in savings
Figuring out what to set aside in savings starts with your goals. What are you saving for — and how do you know what the “right” number is?
Katie Brewer, CFP, and owner of the financial planning firm Your Richest Life, suggests having one account for an emergency fund and one for short-term goals, like a vacation or a new deck.
“Keep your long-term and short-term money separate so you have dedicated goals,” Brewer says. “This will help you focus more on what’s needed in each area.”
How much should be in your emergency savings?
First, Brewer says it’s important to start with an emergency fund and decide what amount you’re comfortable with putting in there. The well-known rule of thumb is to have three to six months’ worth of expenses set aside in an emergency fund.
Kevin L. Matthews II, an author and founder of financial education website Building Bread, says that you might need to modify the rule of thumb, depending on the situation.
“Really, now that we’ve seen how fragile the job market can be, padding out that emergency fund is even more important,” Matthews says. “I’d strongly consider building an emergency fund of nine months’ worth of expenses, or more.”
In order to come to that number, look at your current situation. To start, Matthews recommends looking through your past few months’ of expenses to get a feel for where the money is going and deciding how much you need. Brewer says a simpler method is to simply use your take-home pay as the yardstick. Either way, it’s important to come up with a goal you can begin working toward.
Be careful, though. Some experts warn that you don’t want to put too much into a savings account. Once you reach your goal, consider whether putting some money into a taxable investment account might help you earn a better return if you have the risk tolerance.
How much should you set aside for short-term goals?
One the other hand, deciding how much you need to set aside for your short-term goals might be a little more straightforward. Brewer suggests opening a separate account for those types of goals. If you’re saving up for a specific purchase, such as a car or a vacation, you can calculate how much to set aside each month based on when you want to make the purchase.
You can also set up a system where you just keep setting aside money for goals that are more nebulous but could require some larger outlay of cash in the months to come.
“If you’re meeting your emergency fund goals and other financial goals, consider setting aside money each month toward short-term goals in a fun fund,” Brewer says. “That way, you’re always prepared for something spontaneous, and it can be a backup emergency fund, just in case.”
Ideas to grow your savings
When growing your savings, the first thing to do is look for a high-yield savings account where you can keep the money.
“Rates are dropping everywhere because of the current situation,” Matthews says. “However, you can still get more for your money when you look for a high-yield account. Start there, earning more than you’d get at your more traditional bank.”
Set small goals
Next, figure out how you can set anything aside to make it manageable, Matthews recommends. He points out that many people look at the end goal of a savings account and become overwhelmed by the big number. Instead, just get in the habit of setting aside money and building toward your goal.
“It may take you some time, it could take you 12 months,” Matthews says. “The important thing is that you’re growing toward that point. Start small and as you get used to the habit, increase your regular contribution.”
Make savings transfers automatic
As Brewer sees it, the best way to grow your savings is to make it automatic. Figure out when you can have money automatically moved from your checking account to a savings account. For some people, it makes sense to have that transfer take place once a week, with smaller amounts of money. Others plan their transfer for payday so that it coincides with the way employers manage other withholdings from the paycheck.
“Just make sure you don’t have to think about it,” Brewer says. “The best way to grow your savings is to not have to remember to pay yourself. When it’s automatic, you don’t need to worry about whether there’s something left over.”
Plan for unexpected windfalls
Finally, create a plan to use unexpected windfalls to boost your savings accounts. You don’t have to put everything into reaching your savings goals, but you can put a portion of each work bonus, tax refund or inheritance into your account. Brewer suggests deciding on a percentage, such as saying 60 percent will go toward debt reduction, 25 percent toward savings and the remaining 15 percent to something more immediate. There’s no hard and fast rule, though. The important thing is to have some sort of plan that helps you prioritize building your savings.
How to choose the best savings account
Deciding where to put your money is the final hurdle. You know you need to save and you have a rough idea of how much you can set aside each month, but where do you stick your funds?
Brewer says one place to start is to put your money in an account that isn’t connected to your checking account.
“While it might seem convenient to open an account where you have your checking, it also makes it too easy to just get at the money,” Brewer says. “Consider opening an account, especially for your emergency fund, where there’s an extra step that forces you to think about it before you access the money.”
Matthews points out that getting too hung up with interest yields might not be the best approach. While you can open a high-yield account and ought to look for an account with a competitive rate, constantly switching things around can be counter-productive.
Other items to consider, Matthews suggests, include:
- Fees: Look for accounts that don’t charge maintenance fees. Matthews also says that some accounts won’t charge ATM fees, and those can save you money.
- Customer service: Consider opening an account with an institution with good customer service. If there’s a problem, can you talk to someone or at least get help with online chat?
- A good mobile app: Find an institution with a good mobile app that is easy to use so you can manage your account.
“Customer service and a good app become really important right now,” Matthews says. “With the current pandemic, you can’t just walk into a bank and take care of business.”
In the end, putting money in your savings account is about making the most of your finances and using your resources to reach your goals. Figure out what makes sense for you and work out a plan to make it happen.
Featured image by Dean Drobot of Shutterstock.