How Much Money Should You Put Away?
A savings account is a good place to keep money in case of an unexpected expense or emergency, and having a bank account can make it easier to pay bills and monitor spending.
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Bank accounts simplify financial tasks like bill payment and budgeting. Also, a savings account is a good place to keep money in case of unexpected expenses.
However, how much cash should be kept in savings and checking accounts? Is it possible to have an excessive amount of money in savings? 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:
- The other half goes to wants.
- 30% on whims
- Put 20% toward paying off debt and savings.
In order to keep up a minimal level of subsistence, there are a number of fixed costs that must be met each month. 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. Lastly, you can include funds that you put toward savings or debt repayment.
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?
Your ability to maintain a certain balance in a 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
- How you allocate your monthly income and expenses
- Is there interest on balances at your checking account?
- 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. The standard recommendation is to keep at least two weeks' worth of living expenses in a bank account to tide you over until your next paycheck arrives. It's recommended to have at least one month's worth of expenses in reserve, but two months is even better.
If you want to avoid a fee, you might decide to keep more of your money in a checking account. 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're concerned about overdraft fees, it may be prudent to maintain a safety net. When your account balance falls below zero, you will be charged an overdraft fee. Overdraft fees can add up quickly, so it's smart to keep an extra 0 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. You might need this sum for something as immediate as a vacation or as distant as a down payment on a house. 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. Newly released FDIC statistics show that in 2019, nearly all U.S. households (98%) had a checking account. Money market accounts consist of:
- Bank accounts for making checks
- Put money aside
- Accounts for the short-term purchase of government securities
- Investment "call deposit" accounts
- Money-reserved bank cards
In that sample, the mean account value was $42,000 and the median value was ,300. This means the median account holder keeps just over ,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. In its 2021 report on the state of the U.S. economy, the Federal Reserve says: S About 18% of American households do not have a bank account 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, there are some things that the FDIC does insure.
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 by 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. This means that you run the risk of losing some of your money if you keep more than $250,000 in a single bank account and that bank goes bankrupt. 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. Deposits in excess of $250,000 may be split among several accounts at various financial institutions. 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?
An emergency fund is a savings account set aside for the express purpose of paying for immediate, unanticipated, and fully out-of-pocket costs. The traditional recommendation for an emergency fund is three to six months of living expenses. 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. How much, then, ought one to have stashed away in some form of emergency fund, be it a savings account, a money market account
Depending on your current financial standing, you may find it more or less prudent to keep a larger sum of money set aside for unexpected expenses. Having a larger emergency fund might make sense, for instance, if you work in a highly competitive industry. The job search process can take a long time if you suddenly find yourself unemployed. One might feel relieved to have nine or even twelve months 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. To put it another way, that comes out to ,111 monthly. 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.
Picking the Right Financial Account
It's important to have the appropriate account when storing cash in a bank, whether the amount is large or small.
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.
Annual Percentage Yields (APYs) are increasing after a period of nearly two years in which they fell. Consider moving your funds if you've been with the same bank since before the pandemic. Find out by looking around for the best interest rates on checking, savings, money market, and CD accounts at both brick-and-mortar and online banks.
Consider that online banks typically provide higher interest rates than 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, you will not be able to use the branch as often.
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
Avoid missing out on potential gains elsewhere by putting too much of your savings into savings. Keep in mind the FDIC's restrictions as well. In the extremely unlikely event that your bank fails, your savings may be at risk if they exceed $250,000.
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. Keep in mind the FDIC limits for money market accounts just as 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. Keeping some of your funds at a different bank may provide you with a better rate. Spreading your money across multiple accounts at different banks is another way to stay safe and under the FDIC's limits.
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