How much money should I keep in my savings account?

Many people have varying opinions about how much money you should keep in a savings account. An emergency fund should cover your regular expenses and discretionary spending. The amount will depend on your financial situation, but it all starts with your budget.

Setting up your budget

When setting up your household budget, you can take a few different approaches, including the popular options of the 50/30/20 rule or Dave Ramsey's method.

The 50/30/20 rule

Your budget should follow the 50/30/20 rule using your take-home pay after taxes as your starting point. This rule states that you should allocate 50% of your money for costs that don't change. These expenses include your monthly bills, such as mortgage or rent, car payment, utilities, and insurance. Since monthly bills usually don't vary much and need to be paid, they fall under these necessary costs that don’t change.

Next, 30% of your after-tax money should be allocated for your discretionary money. Most financial planners include food in this category because individuals have various eating habits, whether it be cooking at home or dining out. This makes food more of a discretionary spend, even though it's technically a need. You can spend significant amounts of money on food by eating out at restaurants. You can save money by purchasing store brands instead of name brands, or you could buy ingredients to make your meals from scratch. Each option has a different overall cost.

Other expenses included in the discretionary category include entertainment, such as going to the movies or a night of bowling, contributing to charities, or buying a new computer. Your discretionary spending covers your wants or things you can do without and still survive. Although the 50/30/20 rule sets your discretionary expenditures at 30%, several financial experts believe this percentage is too high.

The final 20% connects with your financial goals. Your financial goals should include saving for the future through a 529 plan, 401(k), or individual retirement accounts (IRAs). Retirement funds are critical for your future and usually get managed through financial institutions or brokerage firms. If you currently don't have an emergency fund, you should use this 20% to set one up first and then turn it over to financial goals.

Dave Ramsey method

Financial expert Dave Ramsey has a slightly different perspective for setting up your budget. His breakdown of your take-home pay includes the following:

• Contributing to charity – 10%
• Savings (including retirement) – 10%
• Food (groceries, restaurants) – 10% to 15%
• Utilities (heat, electric, water, sewer, garbage, internet) – 5% to 10%
• Housing (mortgage or rent) – 25%
• Transportation (car payment, fuel, and upkeep) – 10%
• Medical/Health (co-pays, out-of-pocket expenses) – 5% to 10%
• Insurance (homeowners insurance, car, health) – 10% to 25%
• Recreation (entertainment, travels) – 5% to 10%
• Personal spending (discretionary) – 5% to 10%
• Miscellaneous – 5% to 10%

Whichever budget method works best for you, the amount of money you should keep in your savings account will follow from how you calculate these numbers for your living expenses and income.

How much money should I keep in my savings account?

Once again, financial experts vary in opinion about how much money you should have in an emergency fund. Most experts agree that six months of expenses is a reasonable amount. Others suggest three months. Suze Orman, a personal finance expert, suggests eight months of monthly expenses for your emergency fund because it takes the average person eight months to find work if you were to find yourself out of a job. Some financial experts even believe you can go without an emergency fund if you have enough saved in liquid investments and have high-quality insurance.

The total number of months you should budget for monthly expenses for housing, utilities, transportation, medical and insurance, or your needs, is up to you. For most people, this amount is between three to six months. If you need $5,000 for your monthly expenses, you should have $15,000 to $30,000 in an emergency savings account.

Where should I keep my emergency fund savings?

The best place to keep your emergency fund money is in an investment account with relatively safe allocations that earn more interest than a typical savings account, while still easily accessible for withdrawals. You also should have it in a financial institution that is FDIC or NCUA insured to protect your investment. If you don't have an emergency fund or have enough money in your emergency fund, you should create one before saving for the future.

How much should I have in a regular savings account?

The amount of money you keep in a regular savings account depends highly on your budget. A regular savings account lets you build up funds for a dream vacation or high-cost purchase such as a new washer and dryer or computer. Keep in mind that some savings accounts limit the number of withdrawals you can make each month. It's not a place to keep the money for your monthly expenses.

How much should I have in a checking account?

Once again, the amount of money you keep in your checking or debit account follows your budget. You want to have enough money in your checking account to cover your monthly expenses and discretionary spending, plus a buffer to prevent you from being charged any bank fees. Be aware of whether or not your bank has a minimum balance requirement for your checking account, and then maintain that balance to avoid fees.

If you overdraw your checking account by going below a zero balance, you can expect to pay substantial fees. Most banks charge a per transaction overdraft fee. For example, if you overdraft your checking account and have four checks or debits attempted after your overdraft, you'll be charged four separate nonsufficient funds (NSF) fees.

Where should I keep additional cash?

Once you have funded your checking and savings accounts adequately, you may want to look at additional options for your money. When you're able to cover your monthly expenses, start saving for big-ticket items and have your emergency savings funded, it's time to look at additional options available to you, such as:

• Certificate of deposit (CD) accounts: Certificate accounts pay higher interest but tie up your money for a predetermined time. The amount of money you’re able to deposit often determines the terms and rates of a CD account. If you withdraw your funds early from a CD, you could lose any interest earned and pay a penalty.
• Money market accounts: Like a high-yield savings account, a money market account often has transaction limits and minimum balance requirements. Your money is accessible, much like a savings account.
• Retirement accounts: Traditional or Roth IRAs are excellent options for saving even more money for your retirement.
• Education accounts: If you have children, you may want to invest in a 529 education plan to help pay for college.
• Investments: Stocks, bonds, and mutual funds are other options for your additional savings. They typically offer a higher return because of increased risk.

Get an award-winning savings account

Earn more interest without a monthly fee (if you elect for eStatements) in an Alliant High-Rate Savings account.

To read more about savings accounts, check out these other articles:

• What to look for in a savings account
• How to budget for big expenses
• How to start saving money from scratch: A beginner’s guide