Most people have no clue about how much money they should keep in their savings account. The question seems simple enough but if you ask somebody this question, the odds are, you won’t get a straight answer. The common answer is, ‘as much as you can afford to’. But this is not always the right answer, especially if you still living with your parents or are married, in which case you will be expected to contribute to your family’s expenses.
Money is an emotional issue for most people and people tend to approach the topic with a sense of fear and not logic. Some people turn to ‘escapism’ which means, they never really think about this question, leaving it to fate to decide how much they should save.
If you are still doing this, you might know by now that avoiding tough questions, like money management doesn’t cause the problem to go away. It just pushes it down the road and you’ll have to tackle it eventually. However, we have to give credit to the question. Figuring out how much money to keep in a savings account is a difficult problem. But once you know the facts, you may be able to decide it easier.
Saving for an emergency
Saving for retirement or for an asset is good, but saving money for an emergency is even better. God forbid, suppose you are laid off from work, you have an accident, or you require funds for an emergency medical treatment like cancer, where will you get the funds from? You need emergency funds to deal with these emergencies. As a general rule, you should have enough emergency funds for three to six months of living expenses.
Saving for retirement
Retirement funds are funds you put away for when you are older and unable to work like you can now. In the U.S, people can put away money in an IRA or 401 (k) account. These accounts are not like the typical saving account in the sense, some of the money is invested in stocks. In India, the closest thing to this is the provident fund. But it is not advisable to put all your funds in one basket. A savings account allows you to save some money on the side, which you can then divert into other investment products later if you want to.
Saving to fulfil goals
When you are saving money to reach a specific goal, you are actually putting money aside into a savings account dedicatedly, so you can afford something later. It can be a car, a house, a T.V, a exotic vacation or anything else. It is a fact that having a goal and a plan to achieve it, makes it more likely that you will reach it than not. The best place to save this money is in a saving account, which you can access whenever you want.
Calculating how much money to save
There is something called the 50/20/30 rule in personal financial budgeting. This rule says, 50% of your monthly earnings should be kept aside for the things you have to pay for without fail, like groceries, EMIs for different things, rent, and more, 30% should go for things you want, like restaurant dinners, an evening at the bar, or even a mini-vacation. 20% should go towards financial priorities like saving for a rainy day or investing in a mutual fund, which will increase your savings.
So if you are earning Rs. 30,000 every month, using this formula, you should be savings around Rs. 9,000 every month in your saving account or in another investment product. If you are unable to save this much, don’t worry. There is no single answer to this question, applicable to everyone. The important thing is to start thinking about your money, taking charge of it and not ignoring it, hoping things will go away.