The question of “How much money should I have in savings?” is extremely common. This is especially true among millennials and the younger generation these days, as student loans and other debts are much more expensive these days. We all know we should be earning money, and also be aware of how we’re spending it.
But if the question you are asking is how much money should I have in savings, well it’s not exactly the easiest thing in the world to answer. All of this is mostly relative, so if you’re a bit confused just remember that there is no exact number.
However, there are a few ways to figure it out for people thinking about how much cash should I have in savings?. Before we even get into that, we have to get two things out of the way.
Be Aware Of Your Income
I can’t stress this enough, if you don’t already have a savings account, you must create one as soon as possible. I say this because it is extremely important to know the difference between your month’s worth of expenses and month’s worth of saving. Every dollar of your income needs to have a purpose to it.
Of course, all of this depends on how much money you make. But even if you don’t make much, or are struggling to get by even, contribute whatever you can to your savings account. This way you’ll feel a tad bit safer in the future.
Worry About Your Debt First
There is no way to sugarcoat this, debt essentially steals your money and destroys your future plans. Interest rates can drive up over time, and the more you let the debt build, the more you’ll have to pay in the long run. Calculate your month’s worth of expenses, and try to put the rest of your income to pay off your debt.
This sounds drastic sure, but let me explain. Let’s say you have a lot of credit card debt which has piled up over the years. If the amount of money you have in a savings account is less than the credit card debt, then you have a negative net worth.
It doesn’t matter how much money you have in that savings account. In reality, it’s not even your money, as you owe it to the credit card company. So your actual money-saving journey kicks in when your debt is paid off. Don’t put this off, and try to resolve it as soon as possible.
This doesn’t mean you should put all the money from your savings account into fulfilling your debt either. It will be a drastic amount, but try to set the bare minimum of $1200 aside for emergency funds. This could be helpful in case of a rainy day. We’ll talk more about emergency savings later. Finally, let’s get to the matter at hand.
How Much Money To Keep In Savings
Finally, let’s attempt to answer the question on everyone’s minds: how much should you have in savings. Remember, all of this advice and information isn’t exactly objective, but it should give you a general idea. The number will be different for everyone, but we can take a guess based on age, income, and monthly expenses.
So, the answer to how much should I have in savings, depends on the type of thing you are saving up for. Let’s break it down. Savings aren’t just all about retirement, as you’ll quickly learn by reading below.
I mentioned emergency funds briefly above, so what does it really mean to have money stashed away for emergencies, and how savings should I have, I hear you ask?. Emergency funds should cover all of the completely unexpected expenses.
Did a medical emergency come up? Use the emergency funds. Does your car need a new set of brand new tires? Use the emergency funds. They are even more important if something threatens your job security, and you could be out of income for a few months. Having emergency savings should help in that.
Let’s calculate the amount you need. Gather all of your grocery receipts, electrical bills, utility bills, mortgage, etc. We’re talking about all of the essential utilities you need to get by. Internet and phone bills are also included. We’re doing an audit of sorts, so gather all of your essential expenses for the past three months.
Then add up everything, and have a look at what you need to survive for three months. These are just the essentials, so things like books, subscription services, games, etc, should not be included.
Start building up these emergency funds, it should take you some time. The average emergency fund should be able to cover you for about three to six months if you happen to be out of income. Some people recommend more, but the average advice is to aim for six month’s worth of funds
What’s The Point Of Emergency Funds?
Emergency funds will keep you afloat for three to six months if anything unexpected happens. This way major disasters can be a bit lighter on the wallet. If you can aim for more than six months, that’s even better. Of course, this won’t be easy at first. You might even have to look at part-time jobs if you’re a student.
However, you’ll be incredibly thankful to yourself that you did this. As you won’t go into panic mode whenever bad happens, and at least the financial worry can be taken out of whatever situation you are in.
If you can keep building these funds, and aim for even a year of emergency funds in total, you’ll rarely worry about minor inconveniences.
Having money in a savings account is important. Having separate accounts for current, savings, emergency, and retirement funds is even smarter. There are a lot of ways you can save up for retirement savings. However, we only recommend doing this once all of your debts and loans are paid off.
You don’t want to be paying off loans even in your retirement age, and that money should be spent on living the rest of your life peacefully. It wouldn’t be pleasant if the money you gathered in your savings account for all those years would be wasted on paying debts.
Retirement savings are important so that you can relax after all those years of hard work. How can you save up for them? Well, that depends on where you live. Once your debt is through, consider signing up for a 401K or Roth IRA retirement program with the company you work with.
Of course, this only applies if you live in the USA. However, most countries have similar programs for retirement. Be aware of tax deduction, and compound interest rates. The sky’s the limit, so try to contribute to your retirement savings as much as you can.
If you want some average numbers, let’s quickly go through them. By your late 20s, you should have one year of your annual income contributed to retirement savings. That means if you earn $70,000 per year, your retirement savings should have the same amount.
It is recommended for people from ages 35 to 44, to save three times the amount of their annual income. This might seem like a large sum, but start contributing early on and you’ll get there in no time.
Most people hit their peak earning in the ages of 45-50, which means it’s very risky to switch careers at this point. Experts recommend aiming for six times the amount of your retirement figure.
By age 50-65 you will need to have saved up eight times the amount of your annual income.
So you’ve figured out how much you need in emergency funds, and how much to aim for your retirement savings. It would be awfully convenient if those were the only things you needed to save up for. However, life is not that easy, and life can be expensive at times.
Let’s say you want to get married. The average American wedding costs more than $30,000. The cost of a wedding is still pretty high in other countries as well. Thinking of buying a new car? Well, you’ll need to account for tax, monthly gas expenses, and maintenance too. If you want to take a vacation, that’s also quite expensive, especially if you have a family.
We recommend setting up entirely different savings accounts for all of those expenses. Of course, you might have to work a little harder and maybe even find multiple sources of income, but that’s the cost of living in an expensive world like ours, especially in this day and age.
However, if you’re set in all of these departments, you will never have to worry about money for the most part.
Sure, finance can be a bit boring to some, but financial freedom has a nice ring to it, doesn’t it? So if you start to worry about all of this stuff soon, eventually you’ll be ready for whatever heads your way.