It depends on your budget and financial situation. By TIM PARKER Updated on November 2, 2022 Reviewed by KHADIJA KHARTIT Fact checked by YARILET PEREZ Everyone has a different opinion regarding the amount of cash you should keep in your bank account.
The truth is that it depends on how much money you have. The money for your regular bills, your discretionary spending, and the emergency fund portion of your savings must all be kept in the bank.
For day-to-day expenses, you should keep between $100 and $300 in cash in your wallet and approximately $1,000 in a safe at home.
Your budget sets the stage for everything else. It’s possible that you won’t have any money in your bank account if you don’t properly budget. Aren’t you on a budget? Now is the time to create one or improve on your previous planning. Here are some ideas for doing it.
Important takeaways: Your financial situation and savings objectives will determine how much cash you should keep in the bank. Having a budget is the first step.
Two popular budgeting strategies are Dave Ramsey’s method and the 50/30/20 rule.
Both provide a blueprint for allocating funds to regular bills, discretionary spending, and creating an emergency fund from savings.
1:04 The 50/30/20 Rule: How Much Cash to Keep in the Bank First, let’s examine the enduringly popular 50/30/20 budget rule. The rule was introduced by Senator Elizabeth Warren in the book All Your Worth: She co-authored the Ultimate Lifetime Money Plan with her daughter. You don’t have to try to stick to a complicated budget with a crazy number of lines. You can think of your money as being in three buckets.
Fixed costs that do not change: 50% It would be nice if you didn’t have to pay bills every month, but the bills for electricity, water, internet, your car, and your mortgage (or rent) all come. There isn’t much you can do but pay these expenses if you’ve assessed how they fit into your budget and determined that they must be met.
Your monthly budget should cover about half of your fixed costs.
Money for Discretion: 30% Anything that is within reason goes in this bucket. Spend it on things you want rather than things you need.
Interestingly, the majority of planners include food in this category due to the wide range of options available for managing this expense: You could eat at a restaurant or at home, buy name-brand or generic products, or buy a cheap soup can and use organic ingredients to make your own.
A movie, purchasing a new tablet, or making a donation to charity are all options in this bucket. You choose. The standard is 30 percent of your income, but many financial experts will argue that 30 percent is excessive.
Financial Objectives: 20% If you don’t save aggressively for the future, you could fund an IRA or a 529 plan if you have kids, and if at all possible, you should also contribute to a 401(k) or another retirement plan. The remaining 20% of your monthly income ought to go here. Your future depends on this money. The majority of brokerages allow for the creation of retirement funds like IRAs and Roth IRAs.
The majority of these 20% should be used to start an emergency fund if you do not already have one.
The 50/30/20 rule should be applied to your take-home pay, which is your income after taxes.
Another Way to Manage Money: Method by Dave Ramsey Financial expert Dave Ramsey has a different perspective on how you should divide up your money.
His suggested portions look something like this (communicated as a level of your salary):
Giving to Charity: 10% reduction: 10%
Food: 10%–15% Services: 10%–5 % Housing: Transportation: 25% 10% Health and medical: Insurance: 5%–10%: 10%–25% Leisure: Personal Spending of 5%–10%: 5% to 10% Diverse: The majority of your bank account’s cash reserves should go toward your emergency fund in addition to your monthly living expenses and other discretionary funds. Whether it’s the 20% of 50/30/20 or Ramsey’s 10%, the money for that fund should come from the savings portion of your budget.
How much is required? Everyone has their own perspective. The majority of financial experts conclude that you need enough money to cover six months’ worth of expenses: Save $30,000 if you need $5,000 each month to survive.
Suze Orman, a master of personal finance, recommends having an emergency fund that lasts for eight months because that’s about how long it takes the average person to find work.
If you don’t have much debt, have a lot of money saved in liquid investments, and have good insurance, some experts say you should wait no longer than three months.
Is it necessary for that fund to be in the bank? If you want to earn more interest than the pitiful interest you will receive in a savings account, you should keep your five-figure emergency fund in an investment account with relatively safe allocations, according to some of those same experts. However, the past few months may have altered your perceptions of what constitutes “safety.”
The main problem is that you should be able to get the money right away if you need it. Also keep in mind that money in a bank account is protected by the FDIC.
Before putting your savings or financial goals toward retirement or other objectives, you should probably start an emergency fund if you don’t already have one. Build the fund to three months’ worth of expenses, then divide your savings between investments and a savings account until you have six to eight months’ worth.
After that, you should invest your savings in something that earns more than a bank account, such as retirement and other objectives.
How much should I deposit into my savings account?
Your spending plan will determine how much money you should keep in a savings account. Deposits are the goal of savings accounts, not frequent withdrawals. A savings account typically allows for no more than six withdrawals per month. They give you a place to put your money that is separate from your regular banking needs. For example, you can use them to save for a big goal like a dream vacation or an emergency fund.
However, in response to the financial strain caused by the COVID-19 pandemic, the Federal Reserve issued an interim rule allowing banks to withdraw money from savings accounts up to six times per month instead. Instead, customers can transfer and withdraw their savings as many times as they want. Check with your bank for more information about this change, which banks are not required to implement.
