One of the most important components of your financial situation is the money you keep in savings.
From providing security in times of financial uncertainty, to helping you pay for emergency expenses, maintaining a good amount of savings is critical to your financial well-being. The real question is, how much money should you keep in savings?
At minimum, you should keep enough money in savings to cover 3 to 6 months of living expenses. For example, if your monthly cost of living is $3,000, then, at any one time, you should keep between $9,000 and $18,000 in your savings account. This is often referred to as an ‘Emergency Fund’, and is a key component of personal finance.
That said, three to six months of savings is just the recommended minimum. Since emergency expenses aren’t the only thing for which you should save money, you may want to keep a little more than that in savings. So, what other expenses should you be preparing for, and how much should you save for them?
Well, that’s exactly what I’m going to cover in the rest of this post.
Let’s dive in!
In most cases, home expenses are not emergencies. Therefore, you should not have to pull the money from your emergency fund. Rather, you should set aside a little extra money each month to prepare for these periodic expenses.
Some examples of home expenses you should be saving for are things like: a new furnace, a new roof, updates and remodels, new paint, and pretty much any upkeep that comes with homeownership.
When you own a home, there are all sorts of expenses that you have to pay. And if you dip into your emergency fund every time one of these expenses pops up, then you are going to drain your savings.
Now, you can probably cash-flow a lot of the smaller expenses, but if you can even ballpark the timeline in which you are going to have to pay for a big expense, you should be saving for it.
For home expenses, I recommend keeping the equivalent of 1% – 3% of the value of your home in savings. So, if your home is worth $300,000, you should keep between $3,000 and $9,000 in a home savings account.
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Similar to homeownership, if you own a vehicle of any kind, there are expenses that come with it. Whether you’re paying for an oil change, new tires, an alignment, new brakes, or just about anything else, you should have enough money set aside to pay for them.
Automotive expenses while few and far between, are fairly predictable. So, be sure to throw a little money at an automotive savings fund each month.
At any one time, depending on the value and age of your car, it’s a good idea to keep at least a couple thousand dollars on hand for these.
I am a big believer that vacations and travel are an incredibly important part of life. I mean, we only have so many days on this earth, and you shouldn’t spend them all working. You need to take some time to relax, enjoy time with your family, and just separate yourself from the world at least a couple times a year.
That said, I am also a huge believer that you should save and pay cash for every one of your vacations. I mean, nothing will wreck a good, relaxing vacation like spending months paying off the credit card you used to pay for the trip. Seriously, if the point of your vacation is to relax, then why would you even flirt with the stress that comes with debt?
That ain’t for me!
Rather, if you just put a couple hundred bucks into a savings account each month, you can take a pretty awesome — debt-free — vacation a couple times a year. Doesn’t that sound nice?
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Non-Emergency Medical Expenses
When it comes to emergency expenses, I’ll admit that my mind immediately thinks of medical bills. But truthfully, in most cases, medical bills are not an emergency.
For example, every year, I end up taking a couple trips to the doctor; the same goes for my wife. And, since we each have a $500 deductible, we keep at least $1,000 for routine medical expenses in savings on top of our emergency fund. That way, we don’t have to touch our emergency fund every time one of us gets the sniffles.
Now, since health insurance can vary widely from person to person, it is hard to give you a specific amount of money you should keep in savings for non-emergency medical expenses. But, in general, it is a good idea to have at least $1,000 stashed away.
Holidays, Gifts and Parties
Throughout the holiday season, it’s common to hear financial experts talk about Christmas Funds. And while that’s great advice, Christmas isn’t the only holiday that comes with expenses.
Between the cost of fireworks for independence day, costumes for Halloween, birthday gifts for friends and family, and a fancy dinner with your significant other on Valentine’s Day, there are quite a few events and holidays waiting to drain your bank account each year.
So, in an effort to avoid debt and stress during these times of joy and celebration, you should keep between $500 and $1,000 dollars in savings. This extra stash of cash can seriously reduce your financial stress throughout the year.
With each new season, comes a different set of expenses. From landscaping and gardening in spring, to back to school expenses in the fall, and even children’s sports and activities throughout the year, it’s a good idea to keep around $500 in savings to cover them.
Since all four seasons happen every single year, there is no excuse for being unprepared.
Oh, and since holiday and birthday expenses could technically fall under the heading of ‘seasonal expenses’, I wouldn’t give you a hard time for grouping these into one savings account. Just be sure to keep a running total for each category. You wouldn’t want to accidentally spend your Christmas savings on a new smoker.
Trust me, that’s a hard one to explain to your family.