The pandemic has strained Americans’ financial resources – savings balances are at their lowest in years. When extra cash arrives, it can be difficult to know how much to save and how much to spend on expenses. But every little bit you put aside helps.
How much should you keep in your savings account?
Your unique financial situation will determine how much of your salary will be spent on savings. Setting aside just a few dollars might seem daunting, but it pays off in the long run to slowly and prudently build your money up.
Here are some factors that determine your savings goals:
- Retirement plans
- Need a big purchase like a house or a car
There’s no right answer as to how much you should keep in your savings, but we’ll go over some factors that will help you set some guidelines.
Income and expenses
The first thing you will want to do is look at your monthly income and expenses. See how much is going into your account, how much is spent and where the money is going. This will help you determine a target number to work towards, such as spending three months to cover yourself if you lose your job.
Recent bank and credit card statements can help you know where your money is going. There are also many banking apps that help you track your monthly spending and budget. Even if you use pen and paper, the idea is to take control by getting an accurate picture of your finances.
Recurring invoices and expenses
Take a look at bills you can’t afford to ignore, like rent and utilities, and get a better idea of what you could cut down on in an emergency. If you have a streaming subscription that you don’t use often, or if you can cut back on your food orders a few nights a week, write down these areas.
Once you’ve done that work, look at the number. Let’s say your monthly expenses are $ 2,000. If your goal is to create an emergency fund for three months of spending, your savings goal would be $ 6,000 or more.
Most experts advise saving for three to six months of expenses, but even saving a few hundred dollars for an unexpected expense like a car repair can do a lot of good.
Determine how much to save
Once you’ve identified your goal, calculate how much money per month or paycheck you need to set aside to meet that goal. You can also see which banks offer the best options for savings accounts.
If you have enough cash, it is advisable to keep separate accounts for long term goals like an emergency fund and short term ones like minor renovations or vacations. But an emergency fund should be your first goal if you don’t have such an account.
Look at your take-home pay and how much you have left after bills. Next, determine a dollar amount or percentage of the money left over to be transferred to savings each month.
Suppose you earn $ 2,800 per month and you have $ 800 left after spending. You can participate in it – $ 100, $ 200, or whatever you can handle – and save it. You can then start to get an idea of how long it will take you to reach your savings goals. For example, if you are working on an emergency fund of $ 6,000 and set aside $ 500 per month, you will reach that goal in a year.
It can get tricky with varying income. Instead of a set number, consider a percentage set as 10% of your total check from your last project. The important thing is to put some money towards your goals on a regular basis.
Plan what you would do with an unexpected windfall of cash. How much would you save and how much would you spend?
What about debt repayment?
Also, try to set aside a certain amount each month to pay off certain debts. Continuing the previous example, if you put $ 500 towards your financial goals each month and $ 100 towards your principal debt balance, it will help you pay off your debts while building up your savings. Keep in mind that this will also change your goal timeline.
Where to put your money?
Not all banks are created equal. You want to put your money in a savings account that offers a decent interest rate on your balance with little or no fees.
Some fees to watch out for when shopping for banks include:
- Overdraft fees
- Monthly maintenance fees
- Minimum balance charge
- Transaction fees
Most major banks will allow you to open a joint checking and savings account. Look for one that doesn’t require a giant minimum deposit to open an account – some banks will allow you to open an account by depositing any amount of money.
Banks that offer features like overdraft protection and alerts can help you stay on budget. Make sure the bank you work with is FDIC insured so the money you deposit is protected. Avoid banks that charge monthly maintenance fees just to keep the account open. Some banks don’t charge this fee unless your balance drops below a certain amount, so make sure you know that amount in advance.
Find out about the bank’s rules regarding withdrawals. Does it have a maximum number of withdrawals you can make per month? What happens if you exceed this limit?
Look at both conventional banking products and online banking products, as some will offer a better deal than others. A savings account with an institution separate from your main bank might be preferable if it offers a higher interest rate. No matter where you put the money, you should be able to access it instantly if needed.
As of March 2021, some of the best interest rates and institutions for savings accounts are:
All of the above banks are FDIC insured or in partnership with banks that are.
Everyone’s savings goals will be different. If the concept intimidates you, or if you don’t think saving is realistic, start small. Create an emergency account for an unforeseen expense and work from there.
Review all of your income and expenses. See how much you have left after bills, even if it’s just a few dollars. Decide how much you want to put away and how often you are going to do it. If you can, set up an automatic recurring transfer to your savings account.
Set short and long term goals with a realistic timeline, work towards them, and watch your efforts add up.
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