How Much Money Should You Put Away?
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Bank accounts simplify financial tasks like bill payment and budgeting. Furthermore, a savings account is a handy place to keep money that you might need in the event of an unexpected expense.
However, how much cash should be kept in savings and checking accounts? Can one ever have an excessive amount of money stashed away? Maintaining order in your financial life requires a delicate balancing act.
Following the 50/30/20 Principle
How much money you save depends on how you plan to allocate your income and expenses. One of the most well-known percentage-based budgeting frameworks is the 50/30/20 rule. Money should be divided into these three sections according to this budget rule:
- One half to necessities
- 30% on whims
- Invest 20%, pay off debt and save
Everything you have to spend money on that is essential to your survival constitutes your "needs." That's the case even for necessities like housing, utilities, and food. Dining out and attending the movies are examples of "wants," or discretionary spending. Money that you put away in savings or use to pay down debt makes up the final category.
If you follow the 50/30/20 budgeting rule, all of the money you set aside for savings could be deposited into a savings account. You could put the funds into a high-interest savings account for use in case of emergency or toward another more immediate objective.
Simply put, how much money can you safely keep in the bank?
The maximum balance of your checking, savings, money market, or certificate of deposit account may be restricted by your financial institution. You may be subject to such restrictions on an individual account basis or for your accounts taken as a whole. For instance, you may be limited to no more than $1,000,000 in total deposits across all of your accounts.
These thresholds could be higher, lower, or nonexistent depending on the financial institution you use. Your bank's website or customer agreement should specify the maximum amount of cash you can keep in your account. It is also possible to inquire about deposit limits by calling the bank in question.
To What Extent Should I Rely on My Own Observations
You can use a checking account to pay your bills online or by paper check. With a debit card associated with your checking account, you can shop anywhere that accepts debit cards. And the two accounts can be linked so that money can be moved quickly and easily between them.
But how much of a buffer should you keep in your checking account? The answer may depend on a number of factors, such as
- The method you use to plan your monthly finances
- Do you get interest on your checking account balance?
- Information about the costs associated with maintaining a checking account at your bank
First, let's think about this from a financial perspective. Let's say you use a paycheck-based budget and get paid every two weeks. Having enough money in your checking account to pay at least half of your bills and live comfortably until your next payday is a good way to avoid falling behind. A one-month cushion is a good starting point, but you can increase it to cover two months of living costs if you like.
As a result of this fee, some people choose to keep a larger amount of money in checking accounts than they otherwise would. Monthly maintenance fees for checking accounts are fairly standard at traditional banks. However, if you keep at least a certain amount in your checking account or in all of your bank accounts combined, you may be exempt from this charge.
If you are concerned about overdraft fees, it may be prudent to maintain a safety net. Once your account balance falls below zero, overdraft fees will be assessed. Overdraft fees can add up quickly, so it's smart to keep an extra $500 or $1,000 in checking in addition to your regular amount.
In what proportion of my income should I put away each month?
Money put away in a savings account is money you won't need for some time. A vacation or a down payment on a house are two examples of relatively short-term financial goals. The money you put away in a savings account or money market account can be used as a cushion in case of an unexpected expense.
The amount you put away in a savings account dedicated to a specific purpose, like a trip, a wedding, or a house, is determined by that purpose. Depending on your plans, you may need to set aside $3,000 for a vacation, $10,000 for a brand-new car, or $20,000 for a wedding.
You can determine how much to save by creating a budget for each savings goal. Then, you can either open separate savings accounts for each objective, or, if your financial institution so permits, use a single savings account to which you can add separate sub-accounts. Then, you can divide your savings budget to put money into each subaccount at a rate that's convenient for you.
Considering other people's strategies can be helpful when deciding how much money to keep in the bank. There was at least one transaction account in the hands of 98% of American households in 2019, per the FDIC. Money market accounts consist of:
- Banking institutions that maintain checking accounts
- Put money aside
- Accounts for the short-term purchase of government securities
- Investment "call deposit" accounts
- Using a Prepaid Debit Card
In that sample, the mean account value was $42,000 and the median value was $5,300. This means the median account holder keeps just over $5,000 in savings and checking accounts after removing the extremes.
Keep in mind that the unbanked and underbanked are not accounted for in these figures. The State of the U.S. Economy, 2021 Edition, by the Federal Reserve. S About 18% of American households do not have bank accounts and instead use non-traditional financial services.
Bank Account Balances and the FDIC's Limits
Traditional and online banks alike can rest easy knowing that their depositors are protected thanks to FDIC insurance. There are some restrictions on the types of accounts that are insured by the FDIC and the banks that offer this protection. However, the FDIC does offer insurance for :
When it comes to FDIC-insured accounts, the standard insurance amount is $250k per depositor, per insured bank, per ownership category. If you have multiple accounts in your name at the same bank, up to $250,000 of the total combined balance of your checking, savings, and money market accounts would be protected under the "per depositor" limit.
Applying the "per ownership category" portion of the FDIC coverage definition, your $250,000 limit applies separately to your half of the funds in a joint account you share with a spouse or other person at the same bank.
The FDIC only insures up to that amount, so anything more is at risk. As a result, if you have more than $250,000 in cash on deposit at a single bank, you run the risk of losing some of those funds in the event that the bank fails. Only four banks failed in 2020, which is good news.
In determining how much money to keep in the bank, you can take into account both your bank's account limits and the FDIC insurance limits. You must keep in mind that these restrictions are imposed on each bank separately. Opening multiple accounts at different banks may be a good idea if you have more than $250,000 to deposit. Bank account limits and FDIC insurance limits may be easier to maintain if this is the case.
What Is the Adequate Amount of Money to Keep in an Emergency Fund?
Money set aside in an emergency fund can be used to pay for costs that aren't budgeted for or expected. Three to six months of living expenses in a savings account is the standard recommendation for a rainy-day fund. Following this rule of thumb, you would need between ,000 and $18,000 in an emergency fund if your monthly expenses are $3,000.
Nonetheless, remember that your needs aren't the same as anyone else's. Just how much money should one have stashed away in a savings account or money market account in case of an unexpected expense?
Depending on your financial situation, you may find that you'd rather keep more or less stashed away in an emergency fund. Having a larger emergency fund might make sense, for instance, if you work in a highly competitive industry. There is a good chance that finding a new job after being laid off will take you several weeks or even months. You may feel relieved to have nine or even twelve months' worth of living expenses stashed away in such a case.
However, if your expenses are low and your income comes from multiple sources, you may be able to get by with a smaller emergency fund. For example, if you have several part-time jobs to fall back on, losing your full-time job might not be as devastating to your finances.
What if, as a self-employed person or a gig worker, your monthly expenses and earnings are not stable? As a general rule of thumb, you could use the previous three months' worth of expenses in that case.
The Bureau of Labor Statistics estimates that in 2020 the typical American family will spend ,334. That works out to $5,111 a month. Using that figure as a floor, you'd need anywhere from $15,334 to $30,666 stashed away for emergencies if you save three to six months' worth of living expenses.
Advice on Choosing a Financial Account
Whether you're depositing a large or small sum of money, you should use an account that is well suited to your needs.
Think about things like minimum balances, monthly fees, and interest rates when opening a checking account. Similar considerations apply to money market accounts, certificate of deposit accounts, and savings accounts. This is a crucial time to check the APY on deposit accounts, as interest rates are being adjusted by the Federal Reserve.
Interest rates have been falling for about two years, but now annual percentage yields (APYs) are beginning to rise. Consider moving your funds if you've been with the same bank since before the pandemic. How can you tell which bank offers the best interest rates on checking, savings, money market, and certificate of deposit accounts?
It's important to remember that interest rates offered by online banks are typically higher than those offered by traditional banks. An additional benefit of using an online bank is that you might be able to save money on fees and minimum deposit requirements. However, this means you can't use physical bank branches.
Finally, the Bottom Line
Bank fees, deposit interest rates, and FDIC limits are all factors to think about when deciding how much money to keep in the bank. Considering your needs and objectives thoroughly before settling on a single banking option is essential.
Standard Questions and Answers
Those who save too much may miss out on better investment opportunities. Keep in mind the FDIC's restrictions as well. If your savings exceed $250,000, you run the risk of losing it all if your bank goes under.
Money market accounts offer the best of both savings and checking accounts: high liquidity and competitive interest rates. A large money market account balance is not necessarily a bad thing if the money will be withdrawn for a long-term investment like a car or a house. You should consider the FDIC insurance limits for money market accounts in the same way you would for savings accounts.
It may be more convenient to keep all of your funds in one bank. It is vital, however, to think about whether or not your checking and savings accounts are providing you with the best rates and fees possible. It's possible you could get a better rate if you kept some of your money at a different bank. Spreading your money across multiple accounts at different banks is another way to make sure you don't go over the FDIC's coverage limits.
Are you grappling with the best way to save for retirement? With the countless options available, it can be overwhelming! But not to worry, there is an option that often gets overlooked - the IRA savings account. This safe and interest-bearing account can be the perfect sidekick on your retirement
The assets that are swept to the Vanguard Federal Money Market Fund have a secure home in the VBS division of Vanguard Marketing Corporation. VBS is a member of the FINRA and SIPC, so the assets hold SIPC coverage for securities. It is important to keep in mind that the assets are not guaranteed by FDIC
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The Internal Revenue Service (IRS) requires all interest earned in savings accounts, including those with high-yield rates, certificates of deposits, and money market deposit accounts, to be reported as taxable income on your tax return. Your bank will typically send you a 1099-INT form for any interest