This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about AP Buyline here.
In a nutshell
The answer to the question, “how much should I have in savings?” depends on several factors including:
- Your income.
- Your monthly expenses.
- Your long- and short-term goals.
In this article, we'll take a look at savings strategies, how to build an emergency fund, saving for a purpose, and whether you should use a savings vs. checking account for your money.
How much should I have in savings?
The amount of money that you should save varies by person. Many households have a difficult time saving because they live paycheck-to-paycheck. Hopefully, these strategies will help you manage your money better so that you can increase your savings rate and achieve your financial goals.
Average savings account interest rate
The average savings account interest rate is quite low. According to the Federal Deposit Insurance Corporation (FDIC), the average savings account interest rate is just 0.47%. If you deposit $1,000 in savings and don’t touch it for a year, you will earn just $4.71 interest with monthly compounding.
However, there are some savings accounts that offer interest rates much higher than the average. As an added bonus, many of these high-yield savings accounts have no monthly fees or minimum balance requirements. So, even as you're building up your balances, you can benefit from much higher rates than what your local bank is offering.
Emergency fund
A rule of thumb suggests that you should have three to six months of expenses saved up in an emergency fund. This money is set aside in case you have an unexpected expense that you cannot pay with your normal wages or without going into debt, for example, your refrigerator goes kaput, your insurance doesn’t cover the full damage of an auto accident, or you are laid off from your job.
Depending on your job stability, you may need to have more savings. This is especially true for people with unreliable income, like salespeople on commission, small business owners, or entrepreneurs. Many people in this category aim for one year's worth of expenses or more saved in their emergency fund.
Saving for a purpose
It is not only okay to have multiple savings accounts, it is generally recommended. This way, you can have separate savings accounts for each goal that you have. Many online banks allow you to create multiple accounts or sub-accounts at no extra charge.
In addition to saving for specific goals, you may want to create separate savings accounts for each of your annual bills. Examples include auto, home, and life insurance, property taxes, and car registration. This makes it easier to pay large annual bills by splitting them into 12 equal installments. Plus, you'll earn a small amount of interest on the money you save. You could also create a holiday and birthday present account to ensure that there's enough money to buy gifts without breaking your budget.
Savings vs. checking account
Savings accounts and checking accounts are both offered by banks, but they serve different purposes. A checking account is a transactional account where you make many payments and deposits each month. It generally does not earn interest, and, for many people, having a larger balance may be a temptation to spend more money.
Savings accounts are best for short and long-term goals. By law, there are limits to the number of transactions you can make in this account each month. Savings accounts earn interest and are a safe place to store money that you may need to access in the short term. Many people use savings accounts as an emergency fund or to save towards a specific goal, like a down payment on a house, a home remodel, or annual expenses.
Investing vs. saving
While it is good to have a savings account, you shouldn't keep all of your money in one account. Once you've built an emergency fund and are working towards your short-term goals, you might be better off investing additional money for longer-term goals. Investments often have short-term volatility but tend to grow faster than a savings account over periods of 10 years or more. Investing extra money is a great way to save for retirement or college tuition.
Average savings by age
If you're wondering how you stack up against others of the same age, these are the median average financial assets by age, according to the FDIC Survey of Consumer Finances as of 2022, the latest data available.
Age Range | Average Financial Assets |
---|---|
Less than 35 | $12,500 |
35 to 44 | $32,950 |
45 to 54 | $54,700 |
55 to 64 | $67,700 |
65 to 74 | $120,300 |
75+ | $50,200 |
Keep in mind that these balances include checking, savings, CDs, investments, retirement accounts, and other financial assets. This means that the average consumer keeps only a fraction of these numbers in their savings account.
Strategies for saving more money
If you're looking for ways to save more money, consider one of these strategies to boost your savings rate.
Define your goals
Having clearly defined goals gives your savings a purpose. When goals are undefined, they aren't as motivating. Many people create a vision board for their goals so there's a tangible image of what saving money will do for them. Looking at this vision board multiple times a day or before you spend money will help you decide if a purchase out of your budget is worth it or not.
Automatic withdrawals
Set up automatic withdrawals from your paycheck or bank account to fund your goals. This process makes it easier to save and creates a habit of saving. Increasing the savings rate every few months or when you get a raise accelerates reaching your goals.
Pay yourself first
Many people budget by figuring out all of their expenses and then saving what's left. The "pay yourself first" strategy flips traditional budgeting on its head. You'll pay yourself first the amount necessary to hit your goals, then spend whatever money is left. This approach curtails overspending and ensures that your goals receive priority from your income.
The 50/30/20 Rule
This rule, popularized by Senator Elizabeth Warren in her 2005 book “All Your Worth: The Ultimate Lifetime Money Plan,” offers a simple formula. Keep fixed monthly bills, like your mortgage, car loans, other debt payments, and utility bills, to 50% of your paycheck. Spend 30% on discretionary items like groceries, dining out, clothes, entertainment, and other "wants." The remaining 20% of your paycheck should go towards retirement contributions, college savings, life insurance, and other investments.
Some financial experts consider the 30% category too high. In general, these percentages are a guideline and can be adjusted based on the cost of living in your local area. Increasing your income also provides more flexibility with spending in these categories.
Track your spending for 30 days
Many consumers aren't sure where all of their money goes each month. Tracking your spending for 30 days gives you a realistic view of where your money goes. Review your purchases at the end of the month to determine if there's anything that you can cut back on. Then, you can shift that money away from frivolous purchases and towards the goals that you care about the most.
Eliminate debt
For every dollar you reduce your debt payments, that's one more dollar that can be saved or invested for your future. Plus, the more debt you can get rid of, the less interest that you're paying to the bank. Most people can't eliminate their debt overnight, but you can work towards becoming debt-free by focusing on your goals and being mindful of your spending.
The AP Buyline roundup
Determining how much you should have in savings is a personal decision. Factors like income, cost of living, financial goals, and age have a major impact on this answer. Figuring out your goals is the first step to determining what the "right" balance is for your savings account.
Once you have some goals in mind, follow the strategies outlined above to increase your savings rate and make progress toward your goals. Short-term goals are best served with a high-yield savings account, while longer-term goals may be better off in investments that provide higher opportunities for growth.
This content is created by AP Buyline in accordance with AP’s editorial guidelines and supervised by AP staff. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about AP Buyline here.