How much money to keep in your savings account

Maybe you know it’s smart to control your finances because there have been three recessions since the start of the millennium so far. Yep, as of 2022, that’s an average of one recession every 7.3 years.

A nest egg offers some protection in a financial crisis, whether it’s a global thing or something personal, like losing your job. Officially, nest eggs are called savings accounts. They’re really useful if you need to get hold of money quickly or pay for a big cost you know is coming, like college fees.

But, the question is—how much should you keep in savings? It’s a tough one because you also need to cover your monthly expenses and live a little as well. Don't worry, we have some advice that may help.

How much should you keep in savings?

Truthfully, there isn’t a one size fits all answer here because everyone’s unique, including their income and expenses. You might have heard you should hold between 3 and 6 months’ worth of your typical expenses in a savings account. But that suggestion doesn’t consider your lifestyle or any potentially big expenses you know are up ahead.

You might also feel intimidated about dropping so much of your income into an account, but with the right strategy, it can be surprisingly easy. Finding your target balance and then working toward it is all about preparation and sticking to the plan.

Let’s have a look at what you should consider to figure out what your savings account should hold to cover an emergency. Get out your calculator and total up what you spend every month on the following:

• Rent or mortgage payments

• Utility bills (gas, electricity, water, etc.)

• Insurance premiums (home, medical, car, etc.)

• Traveling costs (car loan payments, gas, public transportation, etc.)

• Debt repayments (credit cards and loans that aren’t your mortgage or car loan)

• Groceries

• Any other regular expenses (clothes, hairstyling, ribeye steak for the dog)

Once you have your total and gotten back off the floor after realizing how costly stuff is—multiply that total by six to really get the shivers. That’s ideally how much you should have in your savings account if you think 6 months is enough to see you through an emergency.

If you think it’s too much, consider this: As of October 2022, almost 1 in 5 people were unemployed for at least 27 weeks. Maybe your job’s safe, maybe it’s not, but 27 weeks is almost 7 months. If you’re thinking your monthly expenses make saving that money impossible, keep reading, and you’ll get to the saving money bit.

One last thing before moving on to tweaking your savings goal. You’ll need to decide if the purpose of your savings is to keep you out of debt or to live comfortably during a critical period. If it’s the latter, you’ll probably need to add at least 5-10% to have a comfortable cushion.

Ok, that wasn’t the last thing—this is: If you’re a freelancer or your income fluctuates for some other reason, you should really think about having up to a year’s worth of savings. If you're someone who never knows how much they’ll earn in the coming month, you’re probably already aware of how fragile employment can be.

Tweaking your savings goal

Although there are many reasons for making sure you’ve got enough savings, there are two that most people would cite. Possibly the most obvious is an unexpected emergency, like a car repair, but there are also sustained periods of worry, such as being laid off from work. In some cases, you might only need to take a few hundred dollars from the account, and in others, thousands.

You’ll need to anticipate what you’ll spend in an emergency, and for that, you’ll need to divide your costs into fixed and variable. Not sure what those terms mean? Let’s have a look at common examples of both.

You can’t avoid your fixed payments, so these should always be included in your calculations. But what about the variable costs?

Let’s say you’ve been laid off from work. While you’re looking for a new job, where can you save money? Can you cut down on the clothes you buy or shop somewhere cheaper?

Try to think ahead to where you could save because this might help you reduce your monthly expenses during a crisis.

But you have to be realistic. Don’t include costs you’re unsure you can reduce, because if the worst happens and you dig deep, your savings could deplete quicker than you expected.

Some saving money tips

If it seems to be taking forever to reach your savings goal, there are some tips to help you save money faster. Let’s have a look at other ways to drop money into your savings account.

• Insurance deductibles:

  You can lower your premiums if you raise your insurance deductibles, although make sure you don’t raise them to a level you’d struggle to manage

• Bundling insurance:

  Can you include your car insurance with your homeowner's or renter's insurance? Check around because insurance companies simply love upselling another of their products when you’re already a customer.

• Insurance discounts:

  While you’re talking to your insurance company, ask if they offer a safe driving discount.

• Reducing energy use:

  Can you lower your energy bills in winter and summer by adjusting your thermostat a little? Energy conservation isn’t only a money-saving tip—it’s also good for the planet.

• Cell phone plan:

  Are you maxing out on your cell phone plan or can you change to a lower-tier one or a prepaid plan? Subscription services: OK, maybe canceling HBO Max is too big an ask, but what about services like HelloFresh or Dollar Shave Club?

• Drive less:

  Are you making more car journeys than you need to? Think about consolidating trips into one because you’ll save on gas, help the planet, and free up more time.

• Become a DIYer:

  Do you call someone whenever a job needs to be done around the house? Why not check out some YouTube videos and have a go yourself if you think it’s safe?

• Plan your meals:

  Not much drives up costs more than walking around a grocery store being tempted by what’s available. If you plan your meals and show some discipline while shopping, you’ll probably save more than you think.

You can also add an unexpected source of income to your savings account rather than spending it. The following short list doesn’t include joys that happen to everyone but when they do—oh boy!

• Tax refunds

• Rebates

• Bonuses

• Cash gifts (maybe that’s how your relatives say “Happy Birthday”)

• Inheritances

• Stimulus checks

Is there a way you can earn more money to add to your savings account? Can your employer offer you more hours, or is there stuff lying around your place that you no longer need and can sell?

How much does the average American have in savings?

Have you ever looked at your savings balance and asked yourself—I wonder how it compares to what other Americans have squirreled away? It’s natural to be curious about how much someone else has and if they’re in the same boat as you (or a better one). It’s never a good idea to ask an individual how much they’ve got, but you can get an average for the country.

According to the Bureau of Economic Analysis, the average American saved between 3% and 3.5% of their disposable income in the second half of 2022. If that doesn’t sound much to you, it’s because it isn’t. Pre-pandemic, it was 8.7%, shooting up to 26.4% in 2020’s second quarter, before dropping as Americans started to spend again at the start of 2021.

So, maybe you’re thinking—great, but what does that mean in real money? Every 3 years the Federal Reserve conducts something called the Survey of Consumer Finances to understand the financial condition of the country’s families. The latest is for 2019 and shows the median being $5,300.

During the period of the survey, the median annual household income in the country was $67,251, making the monthly median salary $5,627. Looking back at the median saving figure of $5,300, this means the typical household has only 1 month of emergency savings at its disposal.

That isn’t much, so if you already have more than a month’s expenses sitting in your savings account—respect. If not, you might want to start building a nest egg soon because you never know when that unexpected big expense will happen.

The bottom line

Hopefully, you now know more about how much you should keep in savings and how you can save on your monthly expenses. So, there’s just one more thing to think about, and that’s choosing the right savings account for you. It might not be with your current bank, so do a bit of investigating because there are plenty of options.

You should be looking for an account that has the best interest rates and the lowest fees because you’ll save and earn more this way. Brick-and-mortar banks are usually stable places, and many have excellent savings accounts, but you’re more likely to get a better deal with an online bank. Federally insured credit unions are also an option.

A final word. Remember to keep an eye on your account, especially if your income and expenses change, as you may need to adjust your savings goals. Don’t forget, a savings account not only holds the money you’ll need in an emergency—it can give you peace of mind.

Frequently asked questions

Is my money safe in a savings account?

Yes, if it’s held in an FDIC-insured bank or branch. The Federal Deposit Insurance Corporation (FDIC) provides insurance up to $250,000 per bank, per depositor, per ownership category, to protect you if the bank goes to the wall. If your account is with a credit union, the National Credit Union Administration will insure it up to $250,000.

Can I have too much in my savings account?

If your bank folds, you’ll only get up to $250,000 back, so anything above that you could lose. You might also want to consider investing some of your disposable income if your savings account already holds enough to see you through an extended emergency.

Should I have more than one savings account?

If you have more than one goal, then opening more savings accounts is a disciplined way of keeping on track with each. For example, one account can be for emergencies and another for home improvements. FDIC insurance cover is per depositor, per bank, per account ownership category, so beware that the $250,000 cap is for all accounts in the bank combined. But, if you open a savings account with a different bank, that account will also be insured for up to $250,000.

How much money should be in my checking account?

You should have at least enough to cover one month’s expenses, with a little over to play safe. If you don’t, you risk going into your overdraft, which will incur expenses you could have avoided.