Everyone has an opinion on how much cash you should keep in your bank account. The truth is, it depends on your financial situation. What you need to keep in the bank is the money for your regular bills, your discretionary spending, and that portion of your savings that represents your emergency fund.
Your sense of how much you should have within reach may need to be assessed. Even if you have an emergency fund, use the lessons of this situation to reconsider what feels comfortable and necessary for the future.
Everything starts with your budget. If you don’t budget properly, you may have nothing to keep in your bank account. Don’t have a budget? Now is the time to develop one or refine your previous planning. Here are some thoughts on how to do it.
THE CENTRAL THESIS
- How much cash you should keep in the bank depends on your financial situation and savings goals. Everything starts with a budget.
- The 50/30/20 rule and finance guru Dave Ramsey’s method are two popular approaches to budgeting.
- Both offer a blueprint for allocating money to your regular bills, discretionary spending, and some of your savings for an emergency fund.
How much cash should stay in the bank?
The 50/30/20 rule
First, let’s look at the ever-popular 50/30/20 budget rule. Senator Elizabeth Warren introduced the rule in the book All Your Worth: The Ultimate Lifetime Money Plan, which she co-authored with her daughter. Instead of trying to stick to a complicated budget with a crazy number of lines, think of your money as sitting in three buckets.
The cost that does not change (fixed): 50%
It would be nice if you didn’t have monthly bills, but utility bills come, as do water, internet, car, and mortgage (or rent) bills. Once you’ve evaluated how these costs fit into your budget and decided they’re a must, there’s not much you can do but pay for them.
Fixed costs should eat up about 50% of your monthly budget.
Free money: 30%
This is the bucket that everything (within reason) goes into. It’s your money to use for wants instead of needs.
Interestingly, most planners put groceries in this bucket because there are so many ways you manage these expenses: you could eat at a restaurant or home, you could buy generic or name-brand drugs, or you could buy a cheap can of soup or a few Organic ingredients and make your own.
This bucket also includes a movie, the purchase of a new tablet, or a contribution to charity. You decide. The general rule is 30% of your income, but many finance gurus will argue that 30% is far too high.
Financial goals: 20%
Unless you’re aggressively saving for the future, maybe fund an IRA, a 529 plan if you have children, and of course, contribute to a 401(k) or another retirement plan if possible, brace yourself for hard times. This is where the last 20% of your monthly income should flow. This financing is essential for your future. Retirement funds such as IRAs and Roth IRAs can be set up through most brokerage firms.
If you don’t have an emergency fund, most of that 20% should be used to create a fund first.
The 50/30/20 rule percentages should be applied to your after-tax income, which is your net income.
Another budget strategy: Dave Ramsey’s method
Financial guru Dave Ramsey has a different take on how you should allocate your money. His recommended allocations look something like this (expressed as a percentage of your take-home salary):
- Donations to charity: 10%
- Saving: 10%
- Food: 10% 15%
- Utilities: 5%10%
- Residential: 25%
- Transportation: 10%
- Medical/Health: 5%10%
- Insurance: 10%25%
- Recovery: 5%10%
- Personal expenses: 5%10%
- Other: 5%10%
About this emergency fund
Aside from your monthly living expenses and spare cash, most of the cash reserves in your bank account should come from your emergency fund. The money for this fund should come from the part of your budget devoted to saving, whether it’s the 20% off 50/30/20 or Ramsey’s 10%.
How much do you need? Everybody has a different opinion. Most financial experts suggest that you need a cash stash equal to six months of spending: if you need $5,000 each month to survive, you’ll save $30,000.
Personal finance guru Suze Orman recommends an eight-month emergency fund because that’s how long it takes for the average person to find a job. Other experts say three months, others none at all if you have little debt, already have a lot of money saved in liquid investments, and have quality insurance.
Should this fund be in the bank? Some of these experts will advise you to keep your emergency five-figure fund in an investment account with relatively safe allocations to earn more than you’ll earn in a savings account. On the other hand, the past few months may have changed your thoughts on what feels “safe.”
The main problem is that the money should be available immediately when you need it. (And also remember that money in a bank account is FDIC insured).
If you don’t have an emergency fund, you should probably create one before investing your financial goals/savings into retirement or other goals. Try to build the fund so that you have three months of expenses, and then split your savings between a savings account and investments until you have six to eight months’ value stashed away.
After that, your savings should retire and have other goals, investing in something that earns more than a bank account.
How much money should I keep in my savings account?
How much money you should keep in a savings account depends on your budget. Savings accounts are designed to receive deposits rather than frequent withdrawals. You are generally not allowed more than six withdrawals per month from a savings account. They offer you a place to invest money away from your day-to-day banking needs, e.g. B. building an emergency fund or reaching a big savings goal like a dream vacation.
However, amid the financial strain of the COVID-19 pandemic, the Federal Reserve has instituted a transitional rule so that banks no longer have to limit withdrawals from savings accounts to six times a month. Instead, customers can make an unlimited number of transfers and withdrawals from their savings. Banks are not required to implement this change. So check with your bank for details.
How much money should I keep in my checking account?
Many transactions can be processed on current accounts, e.g. B. Paying bills or withdrawing cash that you need for daily expenses. The amount of money in your checking account should be enough to pay your monthly bills, withdraw cash for other expenses, and avoid being hit by overdraft fees. It should also contain a buffer. David Ramsey recommends that the amount of buffer should make you feel comfortable, but also not be an amount that would tempt you to do so.
The bottom line
Federal Reserve data from the July 2020 US Household Economic Wellbeing Report showed that 30% of Americans said they would struggle to find $400 to pay for unexpected expenses. While this is a slight improvement from the April 2020 report, when 36% said they would struggle, it still doesn’t leave much room for savings.
Most finance gurus would probably agree that starting to save is a great first step. Plan to increase this amount over time.