What is the ‘correct’ amount to deposit in a bank? saving account? Is it six months of paid expenses? 20% of each paycheck? Or some other magic number? The answer depends on who’s asking. Sometimes financial experts, gurus, and coaches offer conflicting or downright wrong advice because they’re not trained professionals and/or don’t truly understand the financial challenges of the average person.
In an article published online, an American consultant Yahoo Finance It is strongly recommended to ignore any “experts” who offer generic solutions. Instead, it is best to follow the guidelines below to find the solution that best suits your situation.
To understand how much money to set aside, it’s best to answer a series of questions. Let’s see what they are.
Why do you need a savings account?
The main reasons you need to put money in a savings account are Emergency. Or More precisely, savings help prevent difficult events from turning into emergencies. For example, it could turn into a crisis if you don’t have enough savings to cover any of the following expenses:
- Home maintenance
- Rent/mortgage increases
- Car breakdown
- unemployment
- Need for medical intervention
- Paying funeral expenses for a loved one
The money in your savings account can protect you in one of the worst-case scenarios. An example? A total loss of income. In this case, your savings can serve as an income replacement, giving you time to find a new job or other solutions without falling behind on your bills.
How much money should I have in my savings account?
The ideal amount of savings depends on your situation and may change as it changes. Here’s how to determine how much you need:
If you are in debt
If you have high-interest debt, meaning debt with an annual interest rate greater than 7%, such as credit cards, your savings account balance should be kept to a minimum.
If your income and expenses are stable
If you don’t have high-interest debt, aim to have an amount in a savings account that’s equal to three to six months of your family’s living expenses. Of course, this is a very broad range, but it’s relatively easy to understand which goal you should be aiming for.
If you are less likely to face long-term unemployment or large unexpected expenses, three months of living expenses should be enough.
If your income or expenses are inconsistent
Not sure how much money you’ll make? The best goal is to at least save money Six months’ living expenses.
For the self-employed or seasonal workers, savings will help supplement income during the crisis season. It’s true that it’s hard to save money when your income fluctuates, but one way to kick-start savings is to put some money away during the season of abundance.
The six-month period is also a good goal for those who have unpredictable expenses or significant recurring costs. For example, if you have a chronic illness or have minor children, you will need a large savings balance to help you cope with emergencies without resorting to loans.
How can I save more?
Unfortunately, the more precarious your situation, the more money you need to save. If you’re not sure how to achieve the recommended savings goals, use these tips:
- automation: Make sure a portion of every paycheck goes into your savings by setting up automatic deposits in your savings account, even if it’s a small amount at first. You’ll gradually build it up.
- View your bank statement: Review your bank and credit card statements to identify recurring charges that can be written off and to identify bad spending habits. For example, dining out is often an unnecessary expense, and it increased 6% last year due to inflation.
- Try to increase your income: Working longer hours means more income, but it can also be exhausting. A better strategy is to set a goal to increase your salary each year through a raise, promotion, new job, or other means.
- Do Big Things: Cutting back on small expenses (like coffee at the bar) won’t allow you to cut back on big expenses. Look for big expenses that can be temporarily eliminated or replaced with more affordable alternatives.
- Giving up the new car: Most well-maintained cars can go more than 200,000 km. If you avoid buying a brand new car, you will save a lot and avoid significant losses due to depreciation.