For many, the question of “How much should I have in savings?” can vary depending on your unique circumstances. In short, there’s no hard number or one-size-fits-all answer, but there are a few key considerations that may help you calculate what that number might be for you.
Why should you save?
Why save at all? It’s a reasonable question. Many of us have a sense that saving money is an important habit. That saving is wise. But, even when it’s financially feasible, saving money requires some dedication and discipline and many might wonder why we save at all. That’s when it may be important to remember some of the clear-cut reasons to try and save for the future:
- To learn how to save money: Saving money is a foundational practice in basic personal finance. It may teach you to weigh short-term rewards against long-term goals, as well as how to create a plan and stick to it. This may have a spillover effect in other areas of finance, which is why many consider saving the bedrock of personal financial management.
- Emergency preparedness: Having an emergency fund may help you stand prepared for unexpected events, such as job loss, illness, or a natural disaster. If you’re wondering “how much emergency savings should I have?”, a common tactic is to keep enough emergency savings to cover three to six months of living expenses.
- Long-term financial goals: Whether it's saving to put money down on a house, paying for a child's college education, or preparing for retirement, having a sound savings plan can potentially help you track your progress and guide your financial decision-making.
- Capitalizing on unexpected opportunities: A healthy savings cushion may also provide you with the financial flexibility to take advantage of unexpected opportunities, such as a dream vacation or an attractive investment opportunity.
- Peace of mind: Having enough savings to weather storms and pursue goals may provide you with peace of mind and a sense of security. For many, adequate savings might mean being free to focus on the things in life that bring them joy and satisfaction.
How much money should you have saved?
You learned why to save and how it’s helpful above, but how much should you have in savings? To reason out how much money to keep in the bank, you first need a clear understanding of your financial goals and current circumstances.
Establish your short, medium and long-term goals
What are some of your key personal goals and when do you want to achieve them by? What will it take to finance these goals? Knowing these numbers gives you a clearer target to hit. Perhaps you’re planning to start a family and are already thinking of ways to pay for your child’s education. Alternatively, maybe you’re considering some home renovation next year. Picking a goal, deciding on a target date and working out its costs helps give you a timeline to work with.
Understand your current finances
The next step is to establish where you are financially in order to come up with a savings plan. How much money is coming in? How much is going out? Understanding your personal finances and tracking expenses can help you create a successful budget.
Pick a strategy
Once you know the state of your finances and have set timelines for your goals, you can start crunching numbers. If your current disposable income makes it hard to meet certain timelines, you might consider opting for a new budgeting strategy and revising your expenses.
There are many savings strategies that could help answer key questions like how much of your paycheck you should save, how much of your paycheck should go to rent, etc. The 50/30/20 budget, for instance, is a strategy that suggests allocating 50% of your income to necessities, 30% to personal spending, and 20% to savings.
Ways to save
Whatever savings strategy you choose, consistency is key. Learning how to break your finances down into fixed and variable expenses may help support your budget. This involves categorizing your expenses into two categories: those that remain the same each month, and those that fluctuate.
Fixed expenses typically include things like rent or mortgage payments, car payments, insurance and other recurring monthly bills. These expenses are typically necessary and consistent, making it easier to budget for them each month.
Variable expenses, on the other hand, can fluctuate month-to-month and include items such as food, entertainment and other discretionary spending. These expenses can be more challenging to budget for but tracking them over a few months may help you better understand your spending patterns and make more informed decisions about your finances.
Saving is a foundational financial skill. A sound savings cushion may provide numerous benefits in terms of security, financial flexibility and peace of mind. To answer the question, “how much should I have in savings?,” you may want to take a closer look at your personal finances and establish your short, medium and long-term goals. Then, it’s just a matter of picking a budgeting strategy that helps you achieve those goals.