Do You Know How Much Money You Need in Savings?

A savings account is an essential component of most people’s personal finances. Unlike investments in stocks, bonds or real estate, savings accounts allow you to access your money immediately and easily if you need it for an emergency or to cover expenses due to a short-term job loss.

The amount of savings you should have depends on your personal situation. Single-earner households may need more than multiple-earner households. Retirees may have different savings needs compared with people who are still earning income. The number and age of your dependents may also affect how much savings you should have.

It is possible to have too much in savings. At that point, investments may be a better option for part of your funds.

“The key is to strike balance,” says Stephanie Trexler, founder, CEO and certified financial planner at Golden Goose Wealth Planning in Grand Rapids, Michigan.

While there’s no one right answer to how much money you should have in your savings account, three to six months of fixed expenses is “a healthy ballpark figure,” says Leland Gross, founder and CEO of PeaceLink Financial Planning in Virginia Beach, Virginia, and a certified financial planner. Fixed expenses are unavoidable costs, such as housing, utilities, basic transportation, food and loan payments.

“If an individual or couple has reliable, consistent and predictable monthly income, maybe they’d be closer to three months. Others, whose income is inconsistent, less reliable and less predictable, would probably be encouraged to keep six months,” Gross says.

Insurance may be a consideration as well, says Danny Lee, certified financial planner and founder and CEO of Modern Millennial Wealth, a financial planning firm in Denver.

“If you have disability insurance,” Lee says, “the time before the insurance benefit starts is typically 90 days or three months, so covering that gap (with savings) is crucial.”

Some people prefer stashing up to a full year of expenses in a savings account, says Jay Karamourtopoulos, founder and lead financial planner at Hereford Financial in Boston.

“If that is what they’re comfortable with,” Karamourtopoulos says, “that’s the approach that should be taken.”

If you haven’t saved as much as you want, consider tightening your expenses, adding a side hustle, setting up automatic transfers from your checking account to a savings account or using a bank app that rounds up your purchases and puts the extra pennies into savings. Even small amounts can add up over time.

Another way to boost your savings is to take advantage of high-yield savings accounts, which pay slightly more interest than standard savings accounts.

“Slightly more” may still be minuscule in today’s low-rate environment, where the national average interest rate on savings is 0.06% and some banks pay just 0.01%. Even though a high-yield account could get you to 0.5%, that interest rate would turn a $10,000 balance into $10,050 in one year or $10,252 in five years.

Certificates of deposit typically come with better interest rates but also tight withdrawal restrictions that apply before the end of the CD’s term – usually from one month to three years or more.

CDs may be worth a look if you’re planning to hold a large sum that’s dedicated for a specific expense in the near future, such as a boat you plan to buy next spring or tuition that’s due in six months, Lee says.

If you put money into a CD, “those funds should be committed until it matures because if you withdraw funds prior to maturity, there may be penalties,” he adds, though there are banks that offer no-penalty CDs.

CDs generally aren’t the best choice for emergency savings due to the early withdrawal penalties.

“If you’re going to hold large amounts of cash, it makes sense to maximize the interest that you earn,” Trexler says.

When you’ve reached your initial savings goals, you may want to allocate additional savings to investments, such as stocks, bonds, mutual funds or rental property.

Compared with savings, investments offer the opportunity for a bigger return with the risk that you could lose some or all of your principal. Investments tend to be at least somewhat less liquid than a savings account.

Investment returns may help protect you from the loss of purchasing power, which generally diminishes over time due to inflation or rising market prices.

“You should be able to sleep at night and feel comfortable that you have enough cash at the bank for emergencies; however, cash does not keep up with inflation,” Trexler says. “Your money could be worth less next year than it’s worth this year.”

Investing in a retirement account, such as an individual retirement account or Roth IRA, may offer some income tax advantages in addition to helping you save for the future.

“Aligning your goals with your investment (choices) can help ensure you have access to your money when you need it while balancing your long-term savings and investment strategy for retirement,” Karamourtopoulos says.