How Much Money Should Be in Savings?
Having enough money in your savings account is essential for your financial well-being. Why? Because you need to have funds set aside for a rainy day in order to be financially secure. If your car breaks down, do you have enough to cover the costs? What would you do if you lost your job? Would you be forced into debt, possibly have to tap into your retirement fund, or worse, have to sell your home? With enough saved, you are protected from the natural ups and downs of life. You are secure and empowered. How much is enough? How much money should be in savings to ensure that you are in a solid position?
Saving for Emergencies
The Australian Securities and Investments Commission (ASIC) recommends having enough money saved to cover one to three months of expenses. If, for example, your mortgage payments, utility bills, insurance premiums, grocery bills, and other expenses add up to $4,000 a month, then you should have between four and twelve thousand in your savings account. The closer you are to being able to cover your cost of living for three months, or for even longer, the better.
It can be helpful to open a separate account for your rainy day money. This helps to separate the money you are setting aside for savings from the money that you have budgeted for your monthly expenses. Whenever you do dip into your savings account, be sure to replenish it as soon possible. The beauty of building your savings is that once you have enough to cover emergency expenses, you will have extra money that you can use for other things – for investing, for that dream vacation you have been planning for years, to pay down your mortgage faster.
How to Reach Your Savings Goals
What if you only have a few hundred in your savings account right now? How are you ever going to have thousands of dollars sitting in a bank account? You can reach your savings goals. It is simple. You just have to set a goal and commit to it.
- Write down your monthly expenses. Multiply that number by three. This is your goal.
- Make an initial deposit. It does not matter how small or large it is. What matters is that you start somewhere.
- Make a plan. How much can you put away each month to work towards your goal? Twenty dollars, fifty, three hundred? Look at your budget – where can you save a little money each month by cutting your own personal expenses?
- Set up automatic contributions from your checking account to your savings. This way you don’t have to worry about remembering to save every month, or perhaps being tempted to use the money for other things. You just let the money flow into your savings and watch it grow.
Debt vs. Savings
It is important to start building your savings today, but what about debt? Should you pay off your debt first? Maintaining a balance on a high-interest credit card can be an expensive habit, making credit card debt a major financial priority. Think about making small contributions to your savings account until you get rid of any credit card debt. Once your debt is gone, you can put the money you were setting aside for debt payments towards your savings.
Choosing the Right Bank
Knowing how much money should be in savings is important, but you also need to be wise about where you save your money. Use a bank that provides great interest rates and that does not charge monthly fees. You want your money to grow as much as it possibly can, not be dragged down by bank fees.
A high-interest rate will help you to meet your savings goals. It also may inspire you to save more. ASIC has a great guide to explain compound interest rates. Shop around. Compare interest rates. Make sure you are not stifling your savings by choosing a low-interest account.
How much money should be in savings? At the very minimum, make sure you have a one to three-month emergency fund in place. Having enough not only provides you with security, it also gives you freedom, the freedom to work towards your next financial goal.