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Having a good amount of money set aside for an emergency is a great way to ensure that you can avoid taking out loans for unexpected events. It's an important question and one that should be answered before implementing any financial plan: How much money do I need in savings?
You should have at least three to six months of income in savings. The general rule of thumb is that if you’re under 50 years old, aim for an amount equal to three months worth of current income; if you’re over 50, six months of earnings should suffice. Finally, don't forget about emergency funds!
Saving for your future can seem like a daunting task, and you may not even know where to begin. If you’re like most people, your savings is probably lacking in one way or the other, but there are ways that you can better manage your money and save more of it!
Let's take a look at some helpful tips on how to do just that.
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How Much Money Should I Keep in Savings vs. Checking?
As a general rule, the bulk of your money should be in savings. Aim to have at least three to six months of income in savings in addition to your emergency funds. In your checking account, you should have at least $1,000 to cover possible overdrafts and other unexpected expenses.
Save Money for a Specific Purpose
You shouldn't just save money for the sake of it. You need a good reason, such as:
- Emergency funds (job loss, car breakdown)
- Travel budget
There are lots of reasons why saving is important! How much you choose to save depends on your situation. It's never too early or late in life to start saving for something big.
Avoid Paying Fees on Your Checking Account
Several fees can be assessed for extraordinarily high or low balances in your checking account. When you have a checking account, some fees can be assessed for the non-maintenance of the balance.
These fees include a monthly maintenance fee, a non-sufficient fund fee, and a per-check charge. Keeping your balance above $500 in the bank will help avoid these fees being assessed to your account.
You can also choose to have an interest checking account that allows for higher limits on the number of withdrawals or transfers made within a specific time period.
How Do I Estimate Three to Six Months of Living Expenses?
To estimate three to six months of living expenses, you need to consider your essential expenses like rent, utilities, groceries, and other bills. You should also include non-essential expenses like entertainment costs in your calculations.
If you have an emergency fund of three months' worth of living expenses set up already, then it would be a good idea to add another six months’ worth so that you are prepared for any unforeseen circumstances.
Use MoneyUnder30’s Emergency Fund Calculator to get a better idea of how much you may need for an emergency fund.
Make Your Savings Work for You With a High-Yield Savings Account
High-yield savings accounts are available through various banks, credit unions, and other financial institutions. You can compare savings accounts online to find the best one for your needs by checking their interest rates and fees.
Most high-yield savings accounts will offer much higher interest rates than regular savings accounts. This will allow your savings to compound over time and grow more quickly.
Best of all, many high-yield savings accounts have no fees and require a low minimum balance to get started. In some cases, you might even be able to open an account with just $25 or less in starting capital!
Additionally, you won't have to worry about monthly service charges if your balance doesn't meet their threshold for these types of expenses either.
In many cases, you can look to invest or CDs as a way to generate more income from your savings. While these options do come with risk, they can also be a great way to invest money that you won't need for the near future and still make it grow quickly.
Make a Plan for Your Savings
A savings plan is a crucial part of any successful financial strategy. While many people struggle to stick to a savings plan or even put one into place, it's essential that you have some goal in mind when saving money for the future.
Saving can be difficult because there are so many things competing for our income and attention today. Fortunately, success is achievable as long as you make your goals specific and take small steps towards achieving them every day!
Here are three tips on how to set up your own effective savings plan:
- Search online for high yield interest accounts. Use trusted national banks like Chase Bank or Capital One 360 Savings Account. These types of accounts will usually offer much higher rates than traditional bank savings accounts.
- Have an idea of how much you should save per month. Stick to your budgeted savings by transferring money or using an automated transfer.
- Use automated saving services like Acorns or M1 Finance.
Find the right bank and start setting up automatic transfers today if you haven't already done so! Just make sure not to neglect taking care of yourself when budgeting because this will only lead to higher stress levels, leading to less money saved and more stress overall.
With just a few months of income saved up, you can have peace of mind that it won't be as devastating if the unexpected occurs.
That means having an emergency fund and knowing how much income you need to cover your essential monthly expenses for at least three months (or six, depending on age).
You also want to be mindful of interest rates and any penalties that may come with withdrawing money from a retirement account. Consider these factors and some others before making any final decisions, so you don't regret it later!
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