How much do you have in your savings account right now? The average American adult has $3,500 in savings—but that differs a lot by age, socioeconomic status, and geography. Depending on your lifestyle, $3,500 might seem like a fortune; for others, that’s not nearly enough.
Keep in mind that we’re talking about cash in a savings account, not retirement savings. Your savings should function like a rainy-day fund that covers job loss, repair bills, medical costs, and more.
But is $3,500 really enough to cover these bills? How much is the “right” amount to keep in savings, anyway?
Unfortunately, I don’t have a black-and-white answer, and that’s actually a good thing. Personal finance is personal, and your savings rate should be influenced by:
- Your age.
- Your income.
- Your bills and debt load.
- Your future plans.
- If you have children (and how many you have).
- Your risk level.
With that said, there are some general guidelines that we can use to figure out your magic number. If you aren’t sure how much money you need in your savings account, use these 5 tips to set a reasonable savings goal.
1 – $1,000 to start
Some folks say that you should start with $1,000 in your savings account. To be clear, this is an arbitrary number recommended by Dave Ramsey. $1,000 is a pretty small amount to have in your savings account, but it’s a good place to start.
I like the idea of a $1,000 savings goal for folks who are just getting started with their journey to financial freedom. Will $1,000 cover very much? No, but it’s a wonderful way to achieve a financial win and get yourself motivated to save.
Odds are, in pursuit of that $1,000, you’ll make changes that will help you save way more than that initial $1,000. So, if you aren’t sure where to start, start with $1,000 as your first goalpost.
It’s better than $0, and it will help you strengthen foundational habits to save more money over time.
2 – Save for 6 months of expenses
The purpose of a savings account is to cover expenses in the event of job loss, a medical emergency, or other disasters. I personally follow the school of thought that you should have enough savings to cover 6 months of expenses with zero income.
Since the average job hunt takes five months, I feel that six months’ worth of expenses is a great place to be. You can subsist on your savings account, look for a new job, and not worry as much about bills.
Other folks recommend saving 3 or 8 months’ worth of expenses. The exact number will depend on your risk tolerance, but 6 seems to be pretty standard.
So, how do you determine how much money you should save? For people like me who are bad at math, rejoice! It’s super easy:
- Track your expenses like housing, food, and utilities. What’s the average amount you spend on bills each month?
- Take your monthly average and multiply it by the number of months you want to save for.
In practice, this looks like:
Monthly spending: $3,000
Months saved: 6
$3,000 X 6 = $18,000 savings goal
Easy enough, right?
3 – Adjust for risk tolerance and age
But for some people, simply saving enough money to cover expenses might not work. $18,000 sounds like a great goal for a 30-year-old with no kids, but what about a 45-year-old with children and a mortgage?
Your risk tolerance is going to change (and likely decrease) as you get older. The less risk you’re willing to take on, the more cash you’ll want on-hand.
For example, losing your job when you’re a child-free twenty-something isn’t as catastrophic as losing your job at age 40 with extra mouths to feed.
If you’re more comfortable calculating your savings by age, the general guidelines say:
- 1X your income saved by age 30. So, if you make $40,000 a year, you need $40,000 in savings by age 30.
- 2X your income by age 35. That means saving $80,000 on a $40,000 yearly salary.
- 3X your income by age 40.
… and so on.
4 – Save by percentage
But what do you do if you have a variable income? Saving a set amount of money every month is a big challenge when you don’t know what you’ll take home.
This was my reality when I worked for $15/hour as a receptionist. Instead of saving a set dollar amount every month, I just saved a percentage. That helped me save a bit of money each month without shooting myself in the foot.
This comes down to how aggressively you want to save money. If you really want to sock cash away for a rainy day, go with a 20%+ rate.
If you’re barely scraping by, it’s okay to stick with 10% for now. You can always increase your savings rate if things change.
5 – Debt still comes first
I don’t want to discourage you from saving money, but savings probably shouldn’t be your number one concern if you have debt.
If you have $10,000 in debt and $2,000 in savings, you still have a net worth of -$8,000. If you have any kind of debt, consider focusing on debt elimination before bulking up your savings account.
To me, paying interest on debt and owing the bank is too much of a risk. But other people might think that trying to pay off debt without savings is a dangerous path to take.
If you’re looking for a middle ground between debt payoff and savings, you can always split the money 50/50, allocating dollars to both debt and savings.
The bottom line
Savings is a tough topic because everyone has an opinion. In my experience, paying off debt should still be the priority. Once you’re debt-free, it’s important to have enough money in savings that you feel comfortable with daily life. For some people, that’s a magic number like $10,000, and for others, it’s 20% of their income.
Remember, what works for other people might not work for you, so dig deep to determine a savings rate that makes the most sense for your financial goals.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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