Finance

Savings - How Much is Enough?

When it comes to the question of how much money to save, there is no one-size-fits-all solution! But, we can all agree that having money stashed away for emergencies can bring peace of mind if an unexpected expense arises. The general consensus is that you should have enough money to cover three to six months' worth of living expenses — but is this enough? Is it too much? Read on to find out!

January 10, 2022

Savings - How Much is Enough?

When it comes to the question of how much money to save, there is no one-size-fits-all solution! But, we can all agree that having money stashed away for emergencies can bring peace of mind if an unexpected expense arises. The general consensus is that you should have enough money to cover three to six months' worth of living expenses — but is this enough? Is it too much? 

The ultimate answer is largely determined by your financial circumstances, lifestyle, and how much you need to save to feel comfortable. You can begin working on improving your financial cushion once you've decided on a savings goal.

What is the right number? 

You're unlikely to save anything if you don't stick to a budget and set aside money each month for savings. Another major reason for many people's lack of savings habits is a low income. Indeed, nearly one-third of people believe that is the sole reason they do not save more money. Others who aren't saving say they don't know where to start or what type of account or financial instrument to use to successfully save.

Provided putting money aside in such a large amount is intimidating, remember that it is achievable if you have a plan in place.

Here's how to figure out what your target balance should be, as well as some tips for growing your savings quickly.

Understanding your expenses is the first step in finding the right amount of money to save. So, start by going over your recent bank and credit card statements. There are two types of expenses you should budget for: fixed and variable.

Fixed Expenses: 

Fixed expenses stay constant from month to month. These could be your most important bills as well. Fixed expenses include the following:

✔️ Rent/mortgage payments

✔️ Utility bills

✔️ Internet and cellphone service

✔️ Insurance

If you pay the same amount of debt each month, you could add debt payments in this category as well. Any alimony or child support payments you pay would also go here.

Variable Expenses:

Variable expenses are expenses that change from month to month. These might be necessary or optional expenses. Variable expenses include the following:

✔️ Groceries

✔️ Gas and transportation expenses

✔️ Entertainment & Hobbies

✔️ Clothing

✔️ Travel

✔️ Dining out

There are two ways to apply the three-to-six-months rule of thumb for savings once you've calculated your typical monthly costs. You can base your emergency savings goal on your total expenses or what your budget would look like if you reduced some of your variable spending's.

The more non-essential costs you can reduce or eliminate, the further your savings may go.

Getting the Most Out of Your Savings

How much money you need in savings can change depending on your situation. Most of the time, you want to have enough money to handle a financial emergency, which is any big, unexpected expense. There are one-time emergencies, like a vet bill or car repair that you didn't plan for. Costs like these can range from a few hundred dollars to a few thousand dollars. There may be other emergencies that keep coming up and need more savings. Long-term emergencies can include things like losing a job or being sick or hurt and unable to work.

For example: 

Let's say you lose your job. It could take you three months to find another job that pays the same or more than the last one. How much money you'll need to save can depend on how much you plan to spend while you're out of work. Your fixed costs might stay the same, but if you cut costs you don't need, your variable costs might go down. 

So, let's say you usually spend $5,000 a month on everything, including $1,000 on things that aren't really necessary. And you decide to cut back on all of your extra spending's, which brings your total monthly costs down to $4,000. That means you'd need $12,000 in savings to get by for three months without a job. If you think you might not have a job for up to six months, you would need $24,000 saved up. You could be prepared and save enough money to cover your bills for nine to twelve months. In that case, you would want to save between $36,000 and $48,000. Whether or not it makes sense to save that much money depends on how long it might take to find a new job after being laid off and how much money you'd need in the meantime to feel comfortable.

Ways to Save Money More Quickly:

If saving money is important to you, there are a number of ways you can do it faster. Start by looking over your budget to find places where you can cut costs without much trouble. Some ways you could save more money:

✔️ Grouping car insurance with homeowners or renters insurance

✔️ Increasing insurance deductibles can lower your premiums

✔️ Asking your car insurance company about safe-driving discounts

✔️ To save money on your electric bill, turn up your thermostat in the summer and down in the winter

✔️ Switching to a cheaper prepaid plan or downgrading your cell phone plan

✔️ Canceling subscriptions you don't use

✔️ Planning meals and cooking at home

If you haven't already, you can open a separate savings account for your emergency fund and link it to your checking account. Then you can set up automatic transfers from your checking account to your savings account.

Due to the financial effects of the COVID-19 pandemic, the Federal Reserve made an interim rule that says banks no longer have to limit savings account withdrawals to six times per month. On the other hand, customers can make as many transfers and withdrawals as they want from their funds. Banks are not required to make this change, so check with yours for more information.

Utilizing "free" or unexpected money is another way to save more quickly. These windfalls could be added to your savings:

✔️ Tax refunds

✔️ Stimulus payments

✔️ Rebates

✔️ Refunds for purchases

✔️ Cash gifts received for birthdays or holidays

✔️ Bonuses

You could also save money with the cash back you get from credit card purchases. But it only makes sense to use a credit card to get cash back if you can pay off the balance in full every month. If not, the interest you pay could be more than the rewards you get. Additionally, think about ways to make more money to save. You can save extra money by working more hours, getting a part-time job, selling things you no longer need or starting a side business.

What is the Average Interest Rate on a Savings Account?

Currently, the typical return on investment for a savings account is only 0.07%. If you were to leave $3,000 in your account for a year at that rate of interest, you would only receive a few dollars in interest on the money.

On the other hand, if you put the same $3,000 into a high-yield savings account that has an annual percentage rate of 0.50 percent, you will have earned more than $15 after a year has passed. You won't get rich by doing that, but it will make the process of building up your savings account go more rapidly. Because of the compounding effect of the interest over time, your savings were able to grow to an even greater amount. This type of interest is referred to as compound interest.

The Rule of 50/30/20:

Source: Vincere Wealth

50%: Fixed Costs (aren't subject to change)

It would be ideal if you didn't have to pay bills regularly, but you have to pay the electricity bill, as well as the water, internet, car, and mortgage (or rent) bills. If you've looked at how these changes affect your budget and determined that they're necessary, you don't have much choice but to pay them. About half of your monthly budget should go to fixed costs.

30%: Discretionary Costs

This is the bucket into which you can throw anything (within reason). It's your money, so spend it on things you want rather than things you need aka your ‘fun money.’ Most budget planners include food in this category because there are so many options for how you can handle this expense: you can dine out or at home, buy generic or name brand, or buy a cheap can of soup or a bunch of organic ingredients and create your own. A movie, a new tablet, or a charitable donation are all included in this bucket. It's entirely up to you. The traditional guideline is that you should save 30% of your salary, but many may think that this is far too high.

20%: Financial Objectives

You are setting yourself up for financial troubles if you do not aggressively save for the future, maybe through an IRA or 529 plan if you have children, and, of course, by contributing to a 401(k) or other retirement plans, if possible. This is where you should invest the remaining 20% of your monthly income. This money is crucial for your future.  If you don't already have an IRA or Roth IRA, we'd be happy to help you set one up! Click here if you’d like to connect with one of our advisors.

Grab your FREE budget template here. 

Bottom Line

If you haven't started saving yet, now is the time to start. And if you choose the right place to save your money, you can earn the most interest and pay the least amount of fees.

A high-yield savings account at an online bank is a safe way to save money and could give you a good rate of return. Money market accounts and certificates of deposit (CDs) can also give you high returns with low fees. As you try to save money, don't forget to look at your goals and needs from time to time. If your expenses go up or down, that can change how much you want to save. The more you pay attention to your money, the easier it is to change how you save so you don't run out of money in an emergency.

Looking Forward

You can also look into ways to generate even larger rates if you have a good reserve fund in checking and savings and if you're fortunate enough to have money to spare. Certificates of deposit, for example, offer higher interest rates than savings accounts and are a good choice if you do not need your money for months or years.

You might also consider investing. This is a longer-term method for building wealth.

How can you earn money from investing?⁠ 

The most straightforward way you can earn money is if your investments increase in value.⁠ Thanks to compounding returns, the money you’ve invested could make even more money over time. ⁠And sometimes, you can get paid because you own the investment – AKA dividends and interest payments. ⁠

So, how to get started? Good question. 

At Vincere, we can meet you where you’re at – even if it means starting 📝 with just $1. Remember your money could be working harder in an investment account than in a savings account.

If you’re ready to get started with one of our advisors, click here.

Cheers! 

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