Recently, many of my peers have asked me what a good measure of savings is to have in their bank accounts. We know that the interest rate on any savings account, even high-yielding ones is very low, less than 1%, yet the current rate of inflation is 1.5% so basically by keeping too much cash in a saving account you are losing money over time. Last year, the S&P 500 was up 30% according to The New York Times. So, in essence if the money you were “saving” last year was in the stock market, you probably made out well ahead of inflation, but if your money was in a savings account earning even 1% in interest, you lost by .5% on the year.
Now, there is a magic number that should be in your savings account, because things happen in life, and having liquidity in available cash on hand is important. A general rule of thumb is to have between 3-9 months of living expenses in a savings account. Below I have calculated my own personal expenses to show a basis of how much you should save. Of course this varies from person to person depending on your fixed expenses per month, i.e. rent, mortgage, car payments, tuition–and your variable expenses such as gas, food, entertainment.
Fixed Costs Rent/Utilities per month =$980
Variable Costs = $1400
Total Cost of living per month = $2380
Amount of savings net to sustain 6 months = $14,280
Amount of savings net to sustain 9 months – $21,420
For my rainy day fund target, I should be saving between $15,000 and $20,000 to be safe. Any savings that I accumulate on top of that $15,000 will then be dispersed into other money making activities such as stocks, mutual funds, and money markets to earn the highest yield for the year.
By assuring that your savings account is enough to sustain your current lifestyle for 3-9 months of living, try doing a quick calculation yourself. Go over all of your fixed and variable bills and find out how much money is spent per month on living necessities and multiply that by the amount that you feel comfortable keeping as a safety net. Of course only money in your savings account is guaranteed as stocks and other market funds may lose their value (yet over the long term, the stock market has outperformed) Dow Jones Industrial Average 1900-Present.
When it comes time to start saving, be sure to look out for the highest yielding account you can find. Generally, credit unions offer a higher savings yield than larger institutional banks.