Money guide for Millennials
Bank savings accounts don't exactly earn you a huge return these days: in fact, most big banks are offering a fraction of a percent in interest on their savings accounts. However, savings accounts do serve an important purpose as a safety net. Should you run into some sort of crisis (losing your job, injuring yourself seriously and expensively, suffering a car breakdown, or so on) a well-funded savings account can get you through it while avoiding the drawbacks of going into debt. But how do you qualify "well-funded" in terms of a saving account?
Saving the bare minimum
The Federal Reserve Bank of New York holds a monthly Survey of Consumer Expectations in which it asks consumers various questions to determine their financial situation and expectations. One question on the survey asks whether the consumer would be able to come up with $2000 in cash if necessary. That's because the Federal Reserve Bank has determined that this is the average amount a consumer will need to resolve a crisis. Thus, $2000 is the minimum funding goal you should aim for with your savings account. That will be enough to get you through one average-sized crisis. Sadly, in the February 2017 edition of this survey only about 67% of Americans said they'd be able to scrape up that much money.
Going beyond the minimum
Having enough in savings to fund a single crisis is extremely helpful, but it may not be enough for safety. Some common crises may go well beyond the need for $2000. For example, if the primary breadwinner in your family loses his job and is out of work for a few months, $2000 wouldn't begin to cover what you'd need in order to get by. What's more, crises often seem to come in bunches; the car breaks down and then you get sick the very next week. If your savings account is only funded enough to take care of one crisis and you get hit by two in rapid succession, you'll be in trouble.
A better savings goal
How much you really need in your savings account depends on your lifestyle and circ*mstances. If you're single, have a stable job, and you have parents or other family members who can be counted on to help out in a pinch, you won't need to save as much as someone who is married with several young kids and doesn't have anyone else around for financial support. In the former situation, saving enough to get you through three months without any other sources of income should be enough. If your living situation is more precarious or other people are depending on you, aim for 6 to 12 months' worth of expenses in your savings account.
The risk of saving too much
On the other hand, it's possible to overfund a savings account. A highly risk-averse saver may choose to keep putting money into a bank savings account rather than directing it into more volatile assets, such as stocks. Unfortunately, that kind of investing strategy will end up costing this cautious saver money over the long term.
You see, historically, the average rate of inflation in the US is around 3%. That means that any long-term saving and investing strategy needs to realistically plan for a return of at least 3% just to keep from losing money. And while there have been periods when interest rates rose to the point where you could indeed get more than a 3% return on a savings account, these high-interest rate environments usually go hand-in-hand with high inflation rates. Thus, regardless of the base interest rate you're getting now, bank savings accounts will rarely if ever allow you to beat inflation, let alone make a reasonable return compared to your other options.
A good savings strategy with a caveat
Saving money is a high financial priority, but there's one financial priority that's even higher: getting rid of high-interest debt. The rationale is similar to the previous argument about inflation; if you're stuck with a debt on which you're paying 15% interest, then those interest payments will wipe out any possible returns from even the nicest investments. Thus, step one in a savings plan is to pay off any credit card or other high-interest debt. Once you've done so, the next step is to take the money you've been applying to credit card payments and drop it into your savings account instead until you've got a few months' worth of expenses covered.
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When your savings account balance hits the goal you set for yourself, you can start funneling that money into a higher return investment -- typically the best choice at this point is some form of retirement savings account, since the investments in these accounts can grow unburdened by taxes. And with your savings account there to protect you in case of emergency, you won't risk falling back into expensive debt in the future.
CNNMoney (New York) First published June 7, 2017: 11:58 AM ET
FAQs
Standard financial advice says you should aim for three to six months' worth of essential expenses, kept in some combination of high-yield savings accounts and other liquid accounts.
How much do you really need in savings? ›
A good rule of thumb is to have three to six months' worth of expenses tucked away in a savings account as an emergency fund.
How much money should you have in your bank savings account? ›
Many personal finance experts recommend saving at least three to six months' worth of expenses. But this could also vary based on if you experience income fluctuations and other personal factors. If you don't have an emergency fund yet, it can help to start with small savings goals, and work your way up from there.
How much should I actually have in savings? ›
How much should I have in my savings safety net? It's recommended you have at least 3 month's worth of living expenses in a savings safety net, ideally up to 6 months'. Here's a simple way to calculate this: First, examine your budget.
Is $5,000 enough for savings? ›
The FDIC recommends keeping at least six months' expenses in an emergency fund. While $5,000 in savings is nothing to scoff at, it probably isn't enough for most people to meet that criteria.
Is saving $500 a month good? ›
The short answer to what happens if you invest $500 a month is that you'll almost certainly build wealth over time. In fact, if you keep investing that $500 every month for 40 years, you could become a millionaire. More than a millionaire, in fact.
How much does the average person keep in savings? ›
Frequently asked questions (FAQs) How much does the average American have in savings? Excluding retirement assets, the average American has $65,100 in savings, according to Northwestern Mutual's 2023 Planning & Progress Study.
How much balance should I keep in savings account? ›
Building an emergency fund
This dedicated money that you save can be your safety net during unexpected circ*mstances like medical emergencies, job loss, or even an appliance failure. Calculating 6 to 12 months' worth of living expenses is recommended as an appropriate amount for such a fund.
How much is too much to put in a savings account? ›
“Individuals should limit the amount of money in savings accounts to the amount they need to live for two months as long as they can easily access their funds in a safe money market account that pays much higher interest,” said accredited financial counselor Camille Gaines, founder of Retire Certain.
Is saving $1000 a month good? ›
Saving $1,000 per month can be a good sign, as it means you're setting aside money for emergencies and long-term goals. However, if you're ignoring high-interest debt to meet your savings goals, you might want to switch gears and focus on paying off debt first.
This is how much money Americans think you need to be considered wealthy
| Average net worth it takes to be “wealthy” | Average net worth it takes to be “financially comfortable” |
|---|
| All Americans | $2.5 million | $778,000 |
| Boomers | $2.8 million | $780,000 |
| Gen X | $2.7 million | $873,000 |
| Millennials | $2.2 million | $725,000 |
1 more rowSep 6, 2024
By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds. Seamless transition — roughly 80% of your pre-retirement income.
How much savings should I have by age? ›
By age 35, aim to save one to one-and-a-half times your current salary for retirement. By age 50, that goal is three-and-a-half to six times your salary. By age 60, your retirement savings goal may be six to 11-times your salary. Ranges increase with age to account for a wide variety of incomes and situations.
How much do I really need in savings? ›
Most financial experts suggest you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000.
What is too much to have in savings? ›
Experts generally recommend building enough savings in your emergency fund to cover three to six months of living expenses. Others believe you should have six to 12 months of savings in place; essentially, it can vary based on your situation and household.
Is $10,000 enough in savings? ›
According to experts, having $10,000 in savings is an excellent position to be in, and there are several smart moves you can make to optimize your financial situation. “If you have $10,000 in savings, the best way to use it depends on your current financial situation,” said Jake Hill, CEO of DebtHammer Consolidation.
Is $20,000 a good amount of savings? ›
Depositing $20,000 in a savings account is wise when you have a plan for the money, such as a near-term expense or rainy day fund. For long-term goals, like retirement, you might be better served by opening a brokerage account or certificate of deposit (CD).
Is having $100000 in savings good? ›
If you're going to need $100,000 or more in the near future, then it's fine to have that much money in your savings account. There's one situation, in particular, where people often need this much or more in savings: when they're planning to buy a home.
Is 20k in savings good at 25? ›
20k is the ideal savings amount for a 25 year old
“So if you manage to save 15% to 20% of your income, you've made a good start to reach this amount by the time you're 25.”
Is 30k in savings good at 25? ›
By the time you're 25, you probably have accrued at least a few years in the workforce, so you may be starting to think seriously about saving money. But saving might still be a challenge if you're earning an entry-level salary or you have significant student loan debt. By age 25, you should have saved about $20,000.
