Here's how much money you should have in savings — and how to spend any discretionary income you have

By Choncé Maddox

Dec. 17, 2021

Saving money is one of the best financial habits to develop. The question is often not?should you save in general, but?how much should you be saving? While there's no hard rule that says you should have a certain amount of money in your savings account, it's helpful to have some realistic benchmarks.?

·???????How much you should keep in savings depends on your situation and goals.

·???????Most people should aim to have 6 to 12 months of expenses in an emergency fund as an initial goal.

·???????Then, focus on investing — both for and outside of retirement — and keep debt at bay to free up more for savings.

How much you keep in a checking or savings account will vary depending on your situation and goals. Your budgeting style and spending habits will also play a factor. Here are some tips and insights to help determine how much money you should have saved based on your unique situation.?

How much money should you have in your checking account??

When you get paid, the money probably goes directly into your checking account first. Checking accounts are great for managing your money for everyday expenses. It's important to have enough in your account for cash flow purposes and to avoid overdrafts. How much you keep in your checking account is a direct result of your income as well as your budget and regular spending.

Then, the bulk of your excess money can go toward savings goals whether it's investing in retirement, or building your emergency fund. Too much money in your checking account could backfire if it serves as a temptation to make extra unnecessary purchases. Instead, you can put your money to work in the future by saving some of it now.?

1. You should have enough saved as an emergency fund

An emergency fund is often your first line of defense when the unexpected happens and you need extra money to cover an important expense. In the event of a medical emergency, job loss, or other unexpected expense, you can draw from your emergency fund to cover the cost instead of using a credit card or loan.?

This is why building a solid emergency fund is key. Sallie Mullins Thompson, a CPA based in New York, recommends setting aside six months of expenses for a two-income household and 12 months of expenses for a single-income household.

Keep in mind that your monthly expenses won't always be the same as your monthly income. For example, you may spend $4,500 per month but only have planned expenses totaling $3,500 if you include necessary costs like food, transportation, and rent.?

"This money needs to be totally liquid so you can access it when you need it," says Thompson. "Consider putting the money in a bank savings account or a money market so you can easily transfer it when necessary."?

The importance of a high-yield savings account

Placing your emergency fund money in a high-yield savings account is often a better option than a traditional savings account. Traditional savings accounts offer very low interest rates where you might earn only pennies per year.?

High-yield savings accounts offer competitive interest rates that are much higher. That way, you'll actually earn a noticeable amount on your emergency fund balance while it's sitting on standby. Most high-yield savings accounts are available through online banks. This makes it easy to open and manage your account as well as set up transfers from your personal checking account.?

2. The money you have saved should work with your budgeting strategy

Budgeting is a key step to building your savings because you need to know where your money is going and get a handle on household expenses first. Then, you can shift your focus to a strategy that helps you save more money. Below are 4 different budgeting strategies you may want to consider depending on your preferences.?

1. Line-item budgeting

Line-item budgeting is the most basic budgeting strategy that involves simply listing your expenses and how much you predict they'll be. You may want to separate your line-item expenses into budget categories like 'fixed' and 'variable' expenses or even 'necessary' and 'flexible' spending.?

This can help you better categorize your needs vs. wants. With a line item budget, be sure to include your income for the month as well. You should be able to subtract your expenses from your income and come up with either $0 or a positive amount. If you come up with a negative number it means your expenses are more than your income and you'll need to readjust your budget.?

2. Zero-sum budgeting?

Zero-sum budgeting is when you assign every dollar that you earn a specific purpose. This means if you bring home $5,000 per month, your total budget will be $5,000 per month. You can include savings and debt payoff as a budget category, but the idea is to leave no leftover money at the end of the month.??

It's common to get one month ahead financially to use this budgeting strategy especially if your income varies. That way, you can budget down to zero with the exact amount of money that you know you have on hand.

3. Pay yourself first

The pay yourself first budgeting method helps you prioritize saving money. Instead of focusing on bills and other expenses when you receive a paycheck, you'll pay yourself first by sending money to savings and other goals. Then, you can budget for your remaining expenses with the money that's leftover.?

4. Proportional budgeting?

Proportional budgeting is when you take a portion or percentage of your income and put it toward a specific cost. The most common type of budget in this category is the 50/30/20 budget. This method recommends putting 50% of your expenses toward necessities and fixed costs, 30% toward wants and flexible spending, and 20% toward debt and savings.?

3. Instead of leaving money sitting in your account, you should make it work for you

Once you have your desired budgeting method in place, it's time to optimize your income by making your money work with different savings strategies.?

Any extra income after bills should go to retirement instead of sitting in a savings account. If you have access to an employer-sponsored retirement plan, make sure you're contributing to it with pre-tax employer deductions. How much you'll want to contribute to retirement depends heavily on your age, income, and goals.

"Your minimum contribution should be enough to meet the company match (if you have one) and your long-term goal should be to work your way up to contributing the maximum annual contribution with time," says Thompson.

Thompson also recommends taking advantage of both tax-exempt and tax-deferred retirement savings accounts. "If your company plan has a traditional RRSP option, take advantage of these for the tax-free portion," Thompson adds. "If they don't, open an RRSP on your own to diversify your retirement savings."

Quick tip:?Contributing to a TFSA may be a good idea if you don't want to pay taxes later on since you fund the account with taxed dollars. However, if you expect your income to be much lower during retirement, you may want to go with a tax-deferred account like a traditional RRSP to minimize your tax liability overall.?

Consider investing

If you have leftover income after saving for retirement each month, consider investing in the stock market.?

An investment account or brokerage account allows you to invest money into stocks, bonds, mutual funds, and other securities to earn interest and dividends as the market grows. You can often use this money for any purpose or withdraw it during your retired years to supplement your income.?

Thompson recommends opening an investing account once you've saved up an emergency fund. "Due to the multitude of investments available, these accounts can be diversified, rebalanced, and appropriately allocated according to one's risk tolerance," Thompson says.

Quick tip:?It's important not to withdraw too much from a brokerage account too soon. If you sell an asset for more than you paid for it, your profit will be subject to short-term capital gains taxes which starts at 10%.

Open a CD

A Certificate of Deposit or CD is another savings option that is very low risk. Consider putting any leftover money (after saving for retirement and investing) into a CD for a fixed term so it can earn interest. CDs have varying interest rates depending on the term length. It's important to make sure you don't withdraw money before the term is up or you'll get charged a penalty.?

4. Use extra savings to keep debt balances low or eliminate them altogether

Debt can easily hold you back from saving more money. If you have lots of accounts or balances with high interest rates, this will eat up your discretionary income. To keep debt balances low or pay them off altogether, you can add debt payments to your monthly budget and plan for it.?

"It may be that spending on discretionary (not mandatory) costs such as dining out, entertainment, and travel will need to be curtailed until the debt is completely paid off," says Thompson.?

List out your debts and determine how you want to pay them off. Some people choose to focus on the lowest balance first while others choose to focus on the debt with the highest interest rate. Avoid trying to pay all your debt off at once since this can get overwhelming. Instead, focus on one at a time.?

Then, when one debt gets paid off, roll that money over to the next debt payment. Soon enough, you'll free up more of your income that can be redirected to savings.?

The financial takeaway

Saving money is not something that just happens. You have to plan for it by setting goals and taking specific action steps. There's no definite amount to have saved by a certain age since everyone's situation is different. However, you can maximize your savings by doing things like getting on a budget and building an emergency fund.?

Compare high-yield savings accounts and check to confirm how much you're currently contributing to retirement. If you don't have access to a 401(k), consider opening an IRA. To help meet your savings goals, keep your debt balances low and monitor your spending so you can have plenty of money in your budget to save.

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Ray Anderson

Regional Vice President

Primerica Financial Services

Office :?604-521-0336

Cell :?604-786-4781

[email protected]

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