Saving money and putting personal finance tips into practice can be a challenge. Saving money for an emergency fund, let alone a down payment on a house, retirement or a child's college tuition, can take years of constant saving and a lot of discipline. Of course, barring a catastrophe, once you establish those emergency savings and develop positive spending and saving habits, it becomes much easier to stay on top of your finances.
Once you're no longer living paycheck to paycheck and have money saved to cover a medical emergency, job loss, or vacation, you've reached a state of financial stability — but that doesn't mean you can just stop thinking about where to go. your money is going. It turns out that it's possible to keep too much money in the bank, and putting all your savings there can actually hurt your long-term financial goals.
That doesn't mean you shouldn't keep any money in the bank. Liquid savings — money that is easily accessible without incurring fees if the need arises — is necessary for well-balanced financial health.
For most people, these savings take the form of an emergency fund. “When thinking about your overall savings, you should consider an emergency fund as part of the mix,” says Shirley Yang, vice president of Marcus by Goldman Sachs.
Where to keep your emergency fund
Yang says most financial experts agree that your emergency savings should include six months of living expenses, but the actual number depends on your financial stability. Lauren Anastasio, a certified financial planner at SoFi, says three to six months of expenses is a good rule of thumb. If you work in a stable industry, enjoy good health, and live in an area with a low cost of living, you can get away with putting less money—just three months of expenses—in your emergency fund; If there's a chance big expenses (or layoffs) are looming in your future, saving more money might be smarter.
“This money should be kept separate from your regular checking account to avoid accidental spending or the temptation to use funds for something other than an emergency,” says Anastasio.
Keeping those savings in a bank account (rather than an investment account) means you can access them when you need them, but it also means you have a lot of money sitting in one place, depreciating with interest. To keep the value of your emergency fund high, keep it in a high-yield savings account; interest rates have plummeted during the coronavirus pandemic and economic crisis, but the 2% rates we enjoyed in 2019 are likely to return at some point.
In the meantime, if you're looking for a place to store your savings, research current rates and choose a bank with the highest rate possible. As the economy improves, interest rates will likely rise again. Remember that most online banks offer higher interest rates than their brick and mortar peers, put your money somewhere reputable and expect a long wait.
How Much to Put in the Current Account
With all that money saved in your savings account, what do you do with your checking account? This is probably the account you deposit paychecks into, pay bills, and use to cover day-to-day expenses, so you definitely want some money in there. But checking accounts are also notorious for having low interest rates, so the money you keep there isn't doing any work for you.
Unfortunately, there's no one-size-fits-all answer to how much you should keep in your checking account because everyone's monthly expenses are different. However, there are a few ways to determine how much to keep in the account.
If you like setting numbers, Store Wealth recommends a cushion of $ 2,000 to $ 3,000 maximum to account for the ebbs and flows of your money; this may be a little high for some people, especially if your expenses are low.
Yang suggests calculating the best number for you based on your needs. “Consumers should determine their estimated monthly expenses and keep enough in their checking account to cover those expenses,” says Yang. “Any additional funds they have left over, they should consider transferring to something that has a higher yield.”
Anastasio says it depends on how much you feel comfortable having in reserve. In general, though, “a guideline that makes sense for your checking account is to maintain the equivalent of a net paycheck,” she says. “This ensures the amount is right for everyone, regardless of income level.”
When you're still not sure...
At the end of the day, you need to determine how much of a cushion you need in your checking account so you feel confident you can cover all your expenses (and maybe even a few splurges). One of these guidelines can help you figure out what that number is; Once you do this, you can be sure you're not keeping too much in the bank.
Keep in mind that some financial institutions charge fines or fees if your checking account balance drops below a certain threshold. Find out what the rules are for your accounts and make sure you meet the requirements to avoid paying a fee. And the reverse is also true: if your balance is too high – $ 250,000 – it will not be covered by the FDIC; If you're keeping so much money in banks, spread it across accounts or institutions to ensure everything is safe.
Don't forget about investments
All your other money – because you keep saving, right? – should go to investments, where it can have a chance to grow and accumulate faster. (Letting your money make money for both of you helps your savings grow and takes some of the pressure off you.) It could be CDs, bonds, stocks, mutual funds, or another of the many investment options out there, but you want your money to make money. a little work for you. If it is invested, it is expected to be growing, taking you a little closer to your financial goals.
