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If you have the happy problem of trying to figure out where to keep money beyond what you need to pay your monthly expenses, you may not know what the right amount to keep in an account is. standard savings. Don’t worry or make any hasty decisions. Experts have a few simple recommendations.
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The gold standard: 3-6 months
For those who can, it’s a good idea to have a safety net of at least three months of minimum living expenses, according to Scott Alan Turner, a certified financial planner with Rock Star Financial Planning. “We hope for the best and plan for the worst. After COVID-19, many people realized that they could lose their jobs for a long time or see their salary cut in half.
Another reason for a three-month minimum is that if you need to collect disability benefits, there may be up to 90 days of waiting before those benefits become available, Turner said.
Another benefit is that having cash on hand allows you to “take advantage of opportunities as they arise,” Turner pointed out. Whether it’s a sale or a bargain, with cash on hand, “you can get that deal on the spot.”
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Enough to avoid debt
Although the specific dollar amount will vary from person to person (or family to family), having money in your savings account saves you from debt on a credit card or taking out expensive loans, said Adam Wood, co-founder of RevenueGeeks.
He actually recommends saving a bit more – for single-earner households, having a savings account for 12 months of income, and for two-earner households, six months. “Remember that your monthly expenses don’t always equal your monthly income.”
Enough to feel comfortable
The truth is, some people are more comfortable with higher risk, so how many months of income you’ve saved depends on your preferences, says Scott Stanley, Certified Financial Planner and Founder of Pharos Wealth Management. “We all feel inherently different about our money – our comfort levels vary depending on our background, family history, anxiety levels, job security, etc. Simply put, if you feel more comfortable with six months, then this is the right answer for you.
Save more if income is unpredictable
If you have a job that fluctuates, like self-employment or seasonal work, Certified Financial Planner Kenny Senour of Millennial Wealth Management recommended to have up to one year of income in savings. However, he recommended against keeping it in a standard savings account and instead said to put it in a high-interest savings account.
“Having too much cash on hand causes a ‘money downturn’ on your overall portfolio and net worth,” he said. “Excess cash in your portfolio should be deployed toward other goals such as taxable investment accounts or a Roth IRA to allow for additional tax-free growth for retirement.”
But don’t keep so much that you miss growth opportunities
Beyond six months of spending, “you start accumulating a pretty sizable opportunity cost,” Stanley said. “Savings accounts are paying next to nothing right now. The name of the game is beating inflation. Ideally, you should have money allocated to solid investments that will help you beat inflation. If you don’t, the value of your savings will erode over time and your hard work will be wasted.
Consider savings levels
If you thought one savings account was enough, Derek Ripp, certified financial planner and partner at Austin Wealth Management, recommended a different approach, dividing your money into three “tiers.” The first level is for your current and recurring expenses. “The predictable bills that come in every month.” Some keep the bare minimum, others prefer a cushion instead. He recommended that you determine the lowest number you are comfortable with and ensure that this amount is in your checking account.
In the second level, you save for planned expenses over the next 12 to 24 months, such as buying a car, home repairs or vacations. “These are expenses that you know are coming and that you can properly prepare for. Do not be tempted to invest this money by planning these expenses, because it is better not to take risks with the money you know you will need. The goal here is to pay big expenses in full when the time comes.
At the third and final level, you have your emergency fund, which should cover your expenses in case of job loss or other surprise expenses. “It’s money that’s designed not to be spent except in a real emergency.”
The first level is a checking account and the second and third levels are savings accounts. “No matter where you bank, you should consider taking advantage of online banking to get the most out of your money.”
How much you save will ultimately depend on many very individual and personal factors, but now you have a starting point.
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