What’s the Saving Threshold?
This is probably one of the trickiest questions to answer. After all, you are supposed to save money and, of course, the more money you have saved, the better off you are going to be, at least in theory. The fact is, saving your money is never actually going to destroy your financial future and there is definitely a certain amount of comfort in knowing that you have access to additional money in the bank. This is what makes the answer to this question so confusing. The fact is, there is no hard limit answer to this question, and quite frankly, it will be different for most people. Everyone has different needs and also, it is virtually impossible to predict what types of emergencies may arise and how much they will cost.
A standard answer, which takes the average into consideration, is that one should have approximately 6 months’ worth of savings in an account. This means that you could be unemployed for half a year and still maintain your current lifestyle. That is, if you have lost your job, and you no longer have a steady income, the 6 months ‘grace period’ will give you the time to find a new job opportunity, while not having the added stress of having to pay your day to day living expenses. Having at least 6 months of income saved will also enable you to pay for emergency situations without denting your current lifestyle and expenses.
A standard savings account is about putting your money away in order to work for you. That is, you are able to earn interest on your saved funds. While this is a good option, if you have a large sum of money, a standard savings account might not be the route to go. Some account types offer higher rates of return and making sure you put your money into the right type of account, can greatly influence whether your money is working in your favor or not.
When you have been saving for a while or simply have more money to put away, you should be looking at compound interest. While savings accounts do offer some compounding, simply moving your money into a high-yield savings account can make a big difference over the longer-term. You also have the option of investing your money, which could make a bigger impact in the growth of your funds. In the investment world, while you could trade a variety of assets, there are also large funds that invest in a multitude of sectors that you could take advantage of. Most of these are very low cost and are ideal long-term investments. A retirement fund is also a good option to consider but it does come with the limitations of when you can access the money. If you have a retirement fund in place through your employer already, then other types of investing, should be considered.
With this in mind, if the money you are using to invest in, is your savings money, by locking this into investments, you might limit your access to these funds in an emergency situation. This takes us back to the question; how much is too much to put into a savings account? Make sure to put money away into savings that you can access with ease, and then you can look at longer term investments with any additional capital.
Ultimately, it’s your Choice
At the end of the day, it is going to be your choice as to how you divvy up your savings. You certainly should have an emergency fund, which generally falls into the six months’ worth of savings mentioned above. Once this money is saved, you can then think about making your money work a bit harder for you. With your emergency funds already saved, a high-yield savings account should be considered. This is how true wealth is accumulated; over time and through compounding interest.
For many people, having money saved gives them peace of mind. Many also stop saving once they have accumulated six months’ worth of savings. While this is considered to be a safe route, remember that you could be giving up large amounts of wealth due to the effect of compounding interest over the course of years. Money grows exponentially and not in a linear fashion, at least if you put the interest to work for you. Don’t cut yourself out of the other financial rewards that are available to you, even if you already have money saved.