A savings account is an excellent way to set aside funds for future needs, like emergencies, down payments, or investments. However, many wonder how much money they should keep in their savings account.
These accounts offer a low-risk way to earn interest on your funds while keeping them readily available for emergencies and other financial goals. However, deciding how much money to save in your savings account can be tricky, as it depends on various factors such as your income, expenses, financial goals, and lifestyle.
Here are four factors that can influence how much funds you should keep in your savings account:
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Emergency fund
An emergency fund is a vital part of personal finance, money set aside to cover unexpected expenses such as medical emergencies, job loss, or unforeseen expenses. Generally, it is recommended to have at least three to six months’ worth of necessary expenses in your emergency fund, which includes your rent, utilities, food, transportation, and other essential costs.
Keeping this money in a savings account is essential, as it provides easy access to funds when you need them the most. For example, suppose your monthly expenses are Rs 50,000. In that case, your emergency fund in the savings account should be at least double your expenses.
Short-term goals
Keeping the money in a savings account makes sense if you have short-term goals such as saving for a vacation, a down payment for a car or home, or any other expense less than five years away. This is because you can earn interest on your money while keeping it safe and accessible.
However, it’s essential to remember that the interest on savings accounts may not keep up with inflation, which means the value of your money may decrease over time. Hence, investing in instruments such as mutual funds, fixed deposits, or stocks is advisable if you have a long-term goal.
Long-term goals
Suppose you have long-term goals such as retirement or buying a house over five years away. In that case, investing in instruments such as mutual funds, stocks, or fixed deposits is advisable, as they offer comparatively higher returns than savings accounts. These investments carry some risk, but they also provide the potential for higher returns.
While keeping all your money in a savings account for safety is tempting, it’s important to remember that you could miss out on potential returns that could help you reach your long-term goals.
Risk tolerance
Your risk tolerance is another factor influencing how much money you should keep in your savings account. If you have a low-risk tolerance and prefer to avoid financial risks, you may want to save more money in your savings account. This can provide security and help you feel prepared for unexpected expenses.
On the other hand, if you have a higher risk tolerance and are comfortable taking financial risks, you may be comfortable keeping less money in your savings account. However, remember that taking on more risk also means you have a higher chance of losing money.
To wrap up
The amount of money you should keep in your savings account depends on your financial situation and goals. Your risk tolerance and comfort level with financial risks can also influence how much money you should keep in your savings account. To help you determine the best savings account for your needs, you can compare savings accounts of different types. This can help you find a statement with the features, interest rates, and fees that align with your financial goals and preferences.
