PocketGuard is a budgeting app that helps you track your spending. It allows you to connect multiple credit and debit cards so you can track everything in one convenient app. PocketGuard helps you set up budgets for different categories like groceries, clothing, or meals and notifies you as you approach your limit. This app is perfect for overspenders.
How Much Money Should You Have in Savings?
Saving money is easier said than done. In fact, most Americans have little to no savings and are living paycheck to paycheck, instead. There are several reasons for this, but that doesn’t mean you can’t start taking control of your finances and begin making a plan to save money for your future. Here at Rainy Day, we want to help you understand why saving money is important, help you determine how much money you should have in savings, and provide you with a plan on how to get there.
How Much Should You Have in Your Emergency Fund?
Before you start saving to go on that long-awaited vacation or to upgrade to the newest car model, it is a good idea to set aside money for emergency use only, also known as a “rainy day” fund. This money can be used if your car breaks down, your basement floods (homeowner’s insurance may not always cover flood damage), or there is an unexpected loss of income. And if you do pull money from the emergency fund, you need to rebuild the emergency fund before committing money elsewhere.
So, in case of an emergency, how much money should you have in savings? A long-term goal should be to save up to six months of living expenses, meaning the total cost of rent, utilities, groceries, gas, car payments, and other expenses you typically make each month. If your monthly expenses generally total around $2,500, then you’ll want to build out an emergency fund of $15,000 so that in case you have a loss of income, you can live off of the emergency fund while you find a new source of income.
Building out a six-month emergency fund is a great long-term goal, but for many of us, it simply isn’t realistic. Instead, it might be a good idea to build your emergency fund in stages. This will not only take the stress off of feeling like you need $15,000 in the account immediately, but without doing it in stages, it can often feel like it’s getting smaller over time, which can be disheartening. Instead, we suggest the following baby steps in building out an emergency fund:
The $1,000 Rainy Day Fund
Start with $1,000 in your rainy day fund. Let’s say you need to use part of the rainy day fund to buy a new battery for your car or address a similar emergency while saving the first $1,000. Just make sure to pay yourself back as soon as possible.
Two Months of Expenses
Once you have your $1,000 rainy day fund, you can then set your next goal. This can be as big or as small as you want to make it, but we suggest aiming to save two months of expenses. Using our example from above, that would be an emergency fund of $5,000. The good news is that you are already 20% of the way there.
The Six-Month Emergency Fund
If you have kept the course and met the goal of having two months of expenses saved in your emergency fund, then you have likely committed to sustainable habits that should get you all the way to the recommended six-month emergency fund. Remember, the size of your emergency fund is up to you, but having the comfort in knowing that if events outside of your control limit your ability to generate income, you can live comfortably for the foreseeable future while figuring out how to resolve your diminished stream of income. This is why saving money is important.
To ensure that your emergency fund is growing on its own, it is a good idea to keep it in an interest-bearing savings account. Interest rates are at record lows right now, which is unfortunate for those of us who want to save money and see it grow without having to invest it, but even so, opening a high-yield savings account with Ally Bank or Capital One 360 will provide you with growth over time just for having the money sitting there in the account.
We do not recommend investing your emergency fund in a certificate of deposit (CD), a mutual fund, or other stock portfolios as these can lock up the money, making it inaccessible when you need it.
Saving for Future Expenses
Once you have your emergency fund, even if it’s just an initial $1,000 rainy day fund, you can start to consider saving for planned purchases. This can include saving for a down payment on a home, for a new car, for future school expenses, or even just for the next smartphone release. And while we recommend that you keep building up your emergency fund in accordance with the previous section, putting money away for yourself to use outside of emergencies is likely more appealing than the money you simply have but don’t touch unless you have to.
So, how much money should you have in savings for these types of planned expenses? Well, that’s entirely up to you. As a general rule, we recommend budgeting for all of your fixed and variable monthly expenses and including your savings in that budget. By doing that, you can ensure that you are putting away a definite amount each month rather than simply rolling over what’s left in your bank account at the end of each month.
For those with limited income, you may only be able to save a small amount each month as your fixed expenses (rent, utilities, groceries, etc.) take up most of your income. Because of this, we suggest saving a fixed percentage of your income each month instead of a fixed dollar amount. We recommend saving at least 10% of your take-home income each month if you can and as much as 20% if you are able. This may seem like a lot, but remember that instead of buying a car or a smartphone on credit, you’ll be able to purchase those things with cash instead, making them substantially less expensive than if you were to pay interest on those purchases.
How to Start Saving Money
Now that you have a general idea of how much you should have in your emergency fund and how much you should plan to save each month, you need to actually start saving.
Make a Budget
First thing’s first: make a budget, or if you already have one, revisit it. To make your budget, we suggest you start tracking your expenses. This can be done using a money tracking app such as Mint or EveryDollar. These apps will categorize your purchases and show you exactly where your money is going. You can also build your budget right in the app, which can help you be deliberate with your routine expenses.
Make sure to include the following things in your budget:
- Rent
- Utilities
- Groceries
- Gas and Transportation
- Auto Insurance Premiums
- Health Insurance Premiums (if applicable)
- Car Payments
- Student Loan Payments
- Credit Card Payments (if carrying a balance – pro tip: don’t carry a balance)
- Cell Phone
- Internet
- Streaming Services (Netflix, Hulu, Amazon Prime, Disney+, etc.)
- Entertainment
- Child Care
- Household Supplies
Pay off Debt
In addition to creating a budget, the best thing that you can do for your finances is to pay off your debts. We recommend paying off debt with the highest interest rate first (this generally means credit cards). If you carry a balance on your credit card, that $6 coffee will end up costing you a lot more than $6. Additionally, your credit score will thank you.
Be Disciplined
Being disciplined is the biggest part of saving money. You may have a budget, but that won’t help unless you stick to it. Discipline is habitual, but habits are hard to make and easy to break. Try not to get discouraged if you have a hard time saving money, but remember the benefits you can reap from being disciplined with your finances: you can have nice things without paying for them years after the initial purchase.
Start Today
There is no right answer to how much money you should have in savings. For a lot of people, just learning how to start saving money is a great step. Living paycheck to paycheck may be thrilling in its own stressful, terrifying way, but financial independence will save you a few gray hairs and help you purchase things you may not have thought possible. Remember, saving money is a long-term process. It takes time and it takes work, but if you start today, you can start putting your money to work so you can enjoy the benefits.
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