Hi! Thanks for writing! Of course the “absolute” answer to this question depends on your personal situation, but I can provide a bit of general information that I hope will be a helpful guide. You may have heard the term “emergency fund.” In financial planning, an emergency fund is money set aside to cover items you haven’t budgeted for. You build the fund in a savings account so that when a financial surprise crops up, you have money to cover it. Many folks live paycheck to paycheck, using all their income each month to cover their bills. When surprises occur, whether they are happy (baby, wedding, travel) or sad (job loss, breakage, illness, arrests), you’ve got money to cover them. If you are able, it is best to put aside some amount of money each month for emergencies until you have about 3 to 6 months of funds equal to your basic expenses. If your job is project-dependent, you’ll want to have a larger emergency fund to cover the periods when you are in between jobs or if an extended weather delay prevents you from working and getting paid. Keep emergency fund money in a saving account in bank or credit union (rather than in your regular checking account where you may be more likely to use it for random or unplanned uses), and be sure to replenish it if you use it as soon as you are able. Have a great day!
You should keep three to six months’ living expenses in your savings account, plus a bit extra. Most experts recommend saving enough money to live on for the amount of time it would take you to find a new job if you were to lose yours and adding a little more for emergencies.
How to Determine How Much You Need to Keep in Savings
Split your purchases into two categories: fixed and variable. Fixed expenses are those that are roughly the same each month. Your rent or mortgage payment, insurance premiums, and internet and cell phone service would all fall into this category. Variable expenses typically fluctuate more from month to month. These are expenses about which you have more discretion, like entertainment and dining out, as well as personal items like clothing.
Consider how you could cut most or all of your variable expenses in the event of financial hardship. Whatever you can’t imagine going without, add to the total of your fixed expenses. This should be equal to what you expect one month’s living expenses to be for you.
Multiply the sum of your fixed and variable expenses by the number of months you anticipate it would take you to find a new job if you were to lose yours. The resulting figure is the minimum amount of money you should keep in your savings account.
Add a bit more for emergencies. Things like unexpected car repairs and medical bills can easily throw your budget off track. Prepare for them by adding a small cushion to your savings account.
Keeping a lot more than this in your savings account could be unwise. Savings accounts earn very little interest – just 0.04% - 0.22% APY on average between 2009 and 2022. When you factor in inflation, your money could actually lose value over time. Consider opening a retirement savings account, like an IRA, or investing in stocks or bonds with any spare cash you have above and beyond what you need to keep in savings.
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