It is always smart to have some extra money on hand. With this money, you can have your buffer for any unforeseen expenses or a financial setback. You can save money for the short or the long term. Short-term savings are more focused on major expenses that can happen sooner, such as a new car, saving for vacations, or a new washing machine. For the longer term you can for example save for your early retirement or use your savings to pay off your mortgage. Partly because of this difference in short and long-term savings, many people wonder, how much should I have in savings?
The answer to this question depends on your personal situation. What are your savings for? What is your age? Or how long will it take to achieve your savings goal? In this blog, we give you some guidance to help you with this. First, we want to explain some of the advantages and disadvantages of saving. Because we think this certainly influences how much you should save.
What are the advantages of saving
Having your savings in a bank account is a safe way of storing your money. Many banks have a reliable and trustworthy position in the market and are often there to stay for years. Of course, there are exceptions and during the financial crisis some big banks had issues, but the majority of the banks survived and kept your savings secure.
Another advantage of having money in your savings account is that the value doesn’t fluctuate, while it for example does when you invest. With a savings account, you know exactly the amount you have saved, and especially on a US bank account or an EU bank account, you often have online access and able to see all the transactions that occurred.
From your online bank account, you can easily transfer money to your savings account. That makes the step to save money lower, faster, and easier.
What are the disadvantages of saving
As described above, having your savings in a bank account has many advantages. Yet there are also some drawbacks.
First of all, your savings doesn’t yield much because the current savings interest rates are very low. You are somehow assured that the bank won’t eat your savings, but it’s almost certain that your money will not become much more worth over time.
Yet your money devaluates after you have added it to your savings account, but this is not due to the bank. It’s actually inflation that is the culprit for your savings. Inflation causes devaluations, and as a result, you can buy less and less of your savings in the long term. This is something that you should keep in mind as well.
How much should I have in savings
Now that the advantages and disadvantages of saving money are clear, you will probably understand that having a lot of money in your bank account is a little bit of a waste of money.
For most people saving is important to get a stable financial situation and saving alone won’t make them rich. To get the most benefit from saving, you have to save a lot of money in a pretty quick way. When you do this, you are least bothered by the fact that time is not on your side, and the negative effect that you get from inflation won’t hurt you that much.
This extreme way of saving is exactly what the financial independence retire early movement does. If this is something for you, you should consider saving more than 50% of your income.
When you have a considerable amount of money in your savings account, it is highly recommended to do something with that money. Investing your savings in something that yields a much higher return can provide you with much more benefits.
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We can conclude that having money in a saving account is a good idea to prepare for any hefty expenses that can occur. But, don’t have too much money in your savings account. Below we give you some examples of where you can save money for. It helps to give you a better understanding of how much money you should save.
Saving it for a rainy day
You will never know what happens to your current financial situation. You could just lose your job or have to pay for large unforeseen expenses. A financial buffer can cover you in many scenarios and is reassuring for many people. Saving it for a rainy day may definitely help you sleep better! We call this financial buffer your emergency fund.
According to many financial experts, your emergency fund should contain enough money to cover the expenses of 3-6 months. When your living expenses are $2000, you should have a savings amount of between $6.000 and $12.000. It is important to start saving for these emergencies, you can start small. Putting aside a few hundred dollars a month is already a start.
In addition to emergency costs, there are several other expenses for which it is smart to save money. It is useful to consider which expenses these may be so you can save for them as well. We list a couple of major expenses that many households have and for which savings may help.
Saving for home expenses
All parts of a home get old over time. A roof must be replaced after several years. The foundation of your home can have subsidence issues over time. Or the heating needs to be replaced. These are all issues that a homeowner may have to deal with and which involve hefty expenses. You can save for these issues by adding a certain amount of money to your savings account every month.
It helps enormously if you can know when certain parts of your house need to be replaced. Once you know this, you also know when you need a certain amount of money in your savings account.
But, these expenses are very dependent on the house I live in? It’s so hard to determine what my home expenses would be? So, how much should I save for home expenses?
Because home expenses can vary considerably, we suggest saving between 2% – 4% of the value of your house. For example, if you have a $200,000 house, the amount of savings for home expenses is approximately (3%) $6.000. These expenses can of course be lower if you can perform a lot of the work yourself
It is important to keep your savings separate. You should not use any savings from your emergency fund to renovate your house.
If you have only 1 saving account for all your savings, it’s hard to keep track of how much savings are intended for which purpose. We recommend having multiple savings accounts. We explain more about how to structure your savings accounts in the Design Your Financial Freedom Toolkit
Saving for vacations
For many people, vacations are expensive. We believe that vacations are necessary to unwind after all the hard work. Often people go into debt to pay for their vacation costs. This is something we advise against. The risk is that you end up with a fair amount of debt that is difficult to get rid of.
You can also save for your vacation trips. If you put a certain amount of money in your savings account every month, it is possible to completely relax and fully enjoy your vacation without having to worry about any debts.
If you have a hard time saving for your vacation, you can also consider cheaper vacation options. After all, you don’t need much to relax. There are many things that you can do to save money for your vacation, without going into debt.
A good way to find out how much money you need to save for your vacation is to estimate what the total costs would be. Split the total estimate into smaller parts so you get clear which expenditure categories there are. A category can be accommodation, food, fun, and much more.
ONce you have all the categories in place, you can try to find out how you can cut any costs and how much you have to save for your vacation.
Tip! Home Exchange is a great way to share your home with someone else, without money involved. Home Exchange is a different way of going on vacation than what people are often used to, but it is a great way to integrate into the local culture. Tips on using home exchange to save on holidays
Saving for a house
It may sound strange and hard to save for the purchase of a house, but it’s definitely possible. We noticed that many people are interested in purchasing a house without a mortgage. However, not many people are capable of this. We own three properties and never had a mortgage. So, it’s definitely possible. You can read how to save for a house to get an impression.
GET THE FINANCIAL FREEDOM TOOLKIT
We share a complete extensive explanation about how to save for real estate in our Design Your Financial Freedom Toolkit. If you are ready to get started, the Design Your Financial Freedom Toolkit is developed especially for you!
There you have it! I think it is clear that how much savings you need depends on the things you do in life, the assets you have, and the goals you want to achieve.