How Much Should Be in Your Savings Account?

You never know when a rainy day could happen, and your savings account will brace your fall if that rainy day happens.

Without savings, you could be forced to sell your investments at the wrong time. You may even have to pull money out of your retirement accounts. Not only will this disrupt your future, you’ll also have taxes and financial penalties to deal with.

Determine the Right Amount of Savings

Most financial professionals recommend that you have between 3 – 6 months of after-tax spending in your savings. If you’re spending $2,000 per month on housing, food, and wants, you should have between $6,000 to $12,000 in emergency savings.

Three to six months is a general guideline, and the optimal amount depends on how long it takes for you to find a new job.

It takes 6 weeks to find a new job on average. This is the average, and the time could vary based on your job.

If you’re a truck driver, you could find a new job within minutes thanks to the massive driver shortage. A CEO, however, could expect between 6 months to 1 year. Get a feel of your job market, and determine what your ideal maximum savings should be.

Don’t Put Too Much in Savings

You definitely want to have enough saved for a rainy day. Too much in your savings account, however, will guarantee a rainy day.

Savings accounts make next to nothing once you factor inflation. That money could be making much more if you invest in stocks or real estate.

The highest savings accounts rates are roughly 2%, whereas an S&P 500 ETF returns about 10% on average. Therefore, any money in savings is paying 8% in opportunity cost compared to the stock market.

Once you have your savings cushion, make sure the rest of your dollars are working their way down your hierarchy of savings.

Your Savings Account – The Bottom Line

Your savings account is your best protection against a rainy day. By having enough in savings, you’ll be able to cushion a life event such as a job loss.

Without savings, you may have to sell investments when the market is down, causing a dramatic loss. You may even have to pull money from your retirement, which will lead to more taxes and financial penalties.

With that said, there is such thing as having too much money in savings. Savings accounts pay next to nothing in interest after inflation. Any money you put in savings is losing out on the higher returns that stocks and real estate provide.

Make sure you have enough in case something happens, but don’t get crazy. When in doubt, follow our hierarchy of savings.