How much money should I be saving?

Quick insights

• The amount of money you should save may depend on your individual financial goals and circumstances.
• It is generally recommended to save 3 to 6 months of living expenses in an emergency savings account.
• Having multiple savings accounts may help you track progress toward different savings goals.

Saving money can provide a sense of peace when it comes to your finances. In addition to providing financial stability, savings can also be a safety net in case of emergencies and unexpected expenses.

But just how much do you need in savings and what kind of savings accounts should you consider? We've pulled together these guidelines to help you determine which savings route helps you with your financial goals.

How much you need in savings

The amount you should save may be specific to you, your lifestyle and financial goals. However, it is generally recommended to have at least 3 to 6 months’ worth of living expenses in an emergency fund. The ideal amount you have in emergency savings may depend on your:

• Job stability
• Number of dependents
• Existing debt
• Age

This type of savings fund is generally meant to help soften the blow of any financial hardships or unexpected emergencies. But once you establish your emergency fund, there may be other types of savings accounts to consider.

Should I have more than one savings account?

An emergency fund may be the first savings account that you fund, but once you’ve hit that target, what’s next? Do you plan to buy a house, get married or retire? Your financial goals may help to dictate how many savings accounts you have and how much money you want to put in each account.

Having different accounts earmarked for specific savings goals may help provide a clear picture of how you’re progressing toward each goal. It can also provide some added motivation because you can plainly see how much money you have saved toward a particular goal.

Common goals for savings accounts include:

• Building an emergency fund
• Saving for a downpayment on a house
• Saving or an upcoming vacation
• Planning for retirement
• A rainy day fund

Having more than one savings account may take more effort on your part though— especially if these accounts are with multiple financial institutions. It may be helpful to use a budgeting app to track multiple accounts and to implement a system of transferring money to these accounts on a regular basis.

Some accounts may require a minimum account balance. You may want to take that into consideration along with any fees you could incur for going below the balance. In addition, some savings accounts may have limits on the number of withdrawals you can make each month. Exceeding that amount may result in fees.

Savings rate by age

Age and financial goals are often tied together. Someone in their 20s working their first professional job may have different savings goals than someone in their 60s who is approaching retirement.

The amount of money that you have available to save—as in money that’s not already allotted to everyday living expenses—often changes with your age. Financial obligations and life events can drastically alter the amount of money you’re able to put into savings.

But saving even a modest amount early can help later on. Thanks to compound interest, your savings account has the potential to grow over time. An account that has compound interest pays interest on the account’s principal balance and any interest it had previously accrued. Accounts with compound interest apply interest multiple times throughout the year, ranging anywhere from daily to quarterly and beyond. Compounding frequency is as important a consideration as interest rates. The more often interest compounds, the more rapidly this interest accumulates and the faster your money may grow.

Keeping cash at home vs. the bank

Having cash on hand can be helpful if you have an emergency and need immediate access to cash. However, keeping large amounts of cash in your home comes with some risk, including the potential for theft or loss.

On the other hand, there are many benefits to keeping money in a bank, including:

• Interest earnings: Savings accounts and other bank products can earn interest, helping your money grow over time.
• Financial services: Banks provide access to a range of financial services, including loans, credit cards and investment options.
• Record keeping: Banks provide records of transactions, which may be useful for budgeting and tax purposes.
• Security: Bank deposits are often insured up to a certain amount and may provide some protection against theft and loss.

A balanced approach, where you keep a small amount of cash at home for emergencies and the majority of your savings in a bank, might offer the best of both worlds.

Types of savings accounts

There are several types of savings accounts, each designed to meet different financial needs and goals. Some of the most common types include:

• Traditional savings account: This is the most basic type of savings account. This account often provides a modest interest rate and easy access to funds.
• High-yield savings account: High-yield savings accounts offer higher interest rates compared to regular savings accounts. They are often available through online banks.
• Money market account: A money market account generally offers higher interest rates than regular savings accounts and may come with check-writing privileges. They often require a higher minimum balance.
• Certificate of Deposit (CD): A CD is a time deposit where you agree to leave your money in the account for a fixed term, ranging from a few months to several years. In return, you may receive a higher interest rate.
• Individual Retirement Account (IRA) Savings: These accounts are designed for retirement savings and may offer tax advantages.

In summary

Savings can play an important part in helping to protect you against financial hardships as well as planning for the future. An emergency fund can provide a financial cushion should you face an emergency and need access to cash. However, having other savings accounts that are tied to your goals can help to provide motivation and a clear picture of how much you need to save.

The amount that you need to save-and the amount that you can save-will likely change over time, but even saving a moderate amount now can provide bigger savings down the road thanks to compound interest. Even if you're new to savings, a little bit may go a long way over time.