The bank is a great place to keep money safe and readily available, but how much money do you really need to keep in your savings account?
My wife and I are facing this exact question. With a transient lifestyle and a plan to head south in January, we need to have a buffer in our account, but are unsure how to determine the appropriate amount.
There are a number of things to keep in mind when deciding how much liquid cash you should keep in the bank.
My wife and I want to keep enough money in our account so that, if necessary, we can live without much income for a few months. She’s trying to get a job in the south, but it may end up being temporary. Having enough in our account to ensure that we can afford rent, gas, and other necessities is vital.
The amount of money in an emergency fund will vary for everyone. If your family has two stable jobs, then the fund can obviously be smaller, as long as you account for your mortgage or other high fixed monthly payments.
Do you have debts? This would include mortgages, car payments, student loans, and credit card balances. Debts accumulate interest at a rate far higher than your bank can offer in return. It’s quite difficult to find a bank that will offer more than 1% in a money market account, while loans have interest rates that are much higher.
My wife and I are still paying off student loans that have variable interest rates. At the moment, these are 3-4%, but they could increase in the future. Paying these loans down, rather than letting funds sit in the bank at less than 1%, could be a good option for us.
Finding the right balance between paying down debts and keeping enough liquid funds in the bank is key, as overpaying on debt can take years off of the total payment time.
And then there’s investing. Could this be a good option for you? Placing some of your funds into a retirement fund or mutual account can be a great way to get a return on your investment. Though investments average a much higher return than the bank, they are far more volatile; they can lose money some years and pay huge returns other years. Letting things play out over time is best because it will allow you to achieve the average return.
My wife and I are considering investing to increase our retirement funds and also to save for a down payment on a house. One thing to consider is that the risks involved should directly coincide with the amount of time you want to keep the money in a certain investment. While shorter investments should have less risk, you can afford more risk with longer investments, as you’ll recoup losses over time.
What’s the best solution for you?
The best solution will be different for everyone. It’s important to know your financial situation and be aware that things can (and will) change in the future. You also need to account for big life decisions, and budget around these. Factoring in all of these elements will help you determine how much liquid cash you need in your savings account vs. how much money you should use to pay down debts and invest.
How do you decide how much money to keep in your savings account?