A savings account is an essential part 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 in an emergency or to cover expenses due to a short job loss. term.
The amount of savings you should have depends on your personal situation. Single income households may need more than multiple income households. Retirees may have different savings needs than people who are still earning an income. The number and age of your dependents can also affect how much savings you should have.
It is possible to have too many savings. At this point, investments may be a better option for some of your funds.
âThe key is to strike a balance,â says Stephanie Trexler, Founder, CEO and Certified Financial Planner at Golden Goose Wealth Planning in Grand Rapids, Michigan.
How much should you have in your savings account?
While there’s no one right answer to how much money you should have in your savings account, three to six months of fixed spending is “a healthy ballpark,” says Leland Gross, Founder and CEO from 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 repayments.
“If an individual or couple has a reliable, consistent, and predictable monthly income, it might be closer to three months. Others, whose income is inconsistent, less reliable, and less predictable, would likely be encouraged to keep six. months, âsays Gross. .
Insurance can also be a consideration, says Danny Lee, certified financial planner and founder and CEO of Modern Millennial Wealth, a financial planning firm in Denver.
âIf you have disability insurance,â says Lee, âthe time period before the start of the insurance benefit is usually 90 days or three months, so it’s crucial to cover that gap (with savings).â
Some people prefer to store up to a full year of spending in a savings account, says Jay Karamourtopoulos, founder and senior financial planner at Hereford Financial in Boston.
“If that’s what they’re comfortable with,” says Karamourtopoulos, “that’s the approach that should be taken.”
If you haven’t saved as much as you want, consider cutting back on spending, adding a side activity, setting up automatic transfers from your checking account to a savings account, or using a banking app that rounds up. your purchases and puts the extra pennies into savings. Even small amounts can build up over time.
Some savings accounts give you a little more
Another way to boost your savings is to take advantage of high yield savings accounts, which earn a little more interest than traditional savings accounts.
“A little more” can still be tiny in today’s low interest rate environment, where the national average interest rate on savings is 0.06% and some banks pay only 0.01% . Even though a high yield account could get you up to 0.5%, that interest rate would turn a balance of $ 10,000 into $ 10,050 in one year or $ 10,252 in five years.
Certificates of deposit usually come with better interest rates, but also have strict withdrawal restrictions that apply before the end of the CD’s term – typically one month to three years or more.
CDs may be worth a visit if you plan to hold a large sum dedicated to a specific expense in the near future, such as a boat you plan to purchase next spring or a tuition fee that is due in six months, says Lee.
If you put money in a CD, “these funds must be committed until maturity because if you withdraw funds before maturity, there may be penalties,” he adds, although he says. there are banks that offer CDs without penalty.
CDs are generally not the best choice for emergency savings due to early withdrawal penalties.
âIf you’re going to be holding large amounts of money, it makes sense to maximize the interest you earn,â says Trexler.
What should you do once you’ve reached your emergency fund goal?
When you have achieved your initial savings goals, you may want to direct additional savings to investments, such as stocks, bonds, mutual funds, or rental property.
Compared to savings, investments offer the possibility of a higher return with the risk of losing some or all of your capital. Investments tend to be at least a little less liquid than a savings account.
Investment returns can help protect you against loss of purchasing power, which typically declines over time due to inflation or rising market prices.
âYou should be able to sleep at night and feel comfortable having enough money in the bank for emergencies; however, cash does not keep up with inflation, âsays Trexler. “Your money might be worth less next year than it is this year.”
Investing in a retirement account, such as an individual retirement account or Roth IRA, can offer some tax benefits in addition to helping you save for the future.
“Aligning your goals with your investment (choice) 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 declares.
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