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How Much Money Should I Have in a Savings Account?

Should you or shouldn’t you have money in a savings account? It’s such a great question because we all hear the perils of putting money into an account that doesn’t earn a lick of interest. The national average interest rate for savings accounts: A meager 0.05% annual percentage yield. Many national banks pay only 0.01%. In other words, if you deposit $100 in one of those savings accounts, you’ll end up with one measly penny in interest after a year.

But — you can tap into a few reasons why a savings account might serve your needs. Here’s what you should know about your money in a savings account.

How You Can Use a Savings Account

The amount you should keep in savings may depend on what you’re doing with your money or what you earmark it for.

How Much Money Should I Have in a Savings Account?

This is a great question. On one hand, you might hear that you shouldn’t keep any amount of money in a savings account because it “doesn’t pay much in interest.” On the other hand, you know you don’t want to expose money to unnecessary risks — money you know you will need later on. In that case, you might want to stash money in a savings account.

Tip 1: It depends.

Murky, right? Standard financial advice says you should aim for three to six months’ worth of essential expenses. However, a two-income family may only need to cover three months’ worth of expenses — not six. The actual dollar amount will vary depending on how much you need per month. Some families only feel comfortable with 12 months’ of emergency savings saved up!

Tip 2: Keep your budget in mind.

Yep, the “b” word! Everything starts with your budget. How are you going to know how much to save in your savings account if you don’t have a budget? Now’s the time to develop one or adjust the way you budget now. Here are some thoughts on how to do it.

Tip 3: Make sure you have money in risk-appropriate accounts.

Got a five-figure emergency fund in a savings account? You might wonder if that’s overkill — and that’s a good thought. Remember, you’ll only get a paltry amount of interest from a savings account.

Do you have money in your child’s college savings fund in an account that will gain interest? (If you use UNest, you will!)

Do you have retirement money in a retirement fund that will benefit from compound interest? Make sure you put money where it should appropriately go. Your retirement won’t grow enough if it stays stashed in a savings account. You want to invest that money appropriately.

How to Divide Up Where Your Money Goes

Curious about where you “should” put your money? In other words, let’s follow up on the “risk-appropriate” tip just mentioned.

Step 1: Set your goals.

Ask yourself about your short- and long-term financial goals.

Maybe you want to save for a specific goal. For example, if let’s say you want to save $30,000 to build a detached garage. You may want the full amount in savings. On the other hand, maybe you need a new car but only plan to save for the down payment. Figure out how much you need to save, then work up from there.

Maybe you want to have $2 million saved up by the time you retire. How will you get there? (Hint: Pull up a retirement calculator to help you chew those numbers.)

Step 2: Know your living expenses.

What does it cost to keep you afloat? How much do you pay for rent, food, transportation, health insurance and everything else each month?

It’s usually pretty easy to total up your recurring expenses, which don’t change from month to month. Recurring expenses can include:

  • Rent/mortgage
  • Utilities
  • Car payment
  • Auto insurance
  • Payment for student loans
  • Alimony or child support
  • Day care expenses
  • Monthly memberships (such as gym membership)

Try to put a ballpark figure together of not-so-regular expenses, like groceries, medications, medical bills, credit card bills and maintenance and repair for cars and home repairs.

Step 3: Know your income.

This is easy to do if you have one income from one job. However, it’s important to know your total income from all income sources, including your regular job, side hustles, alimony, etc.

Step 4: Fit your savings to your goals.

Remember those goals? How much do you need to pay yourself to hit that $2 million mark in retirement? How much do you need to set aside in an account in order to pay for the detached garage? (This is the goal that you might want to put in your savings account.)

Divide the amount of money your goal will take by the number of months until the deadline to determine your monthly savings amount.

Alternatives to Savings Accounts Based on Your Risk Tolerance

Not sure you want to park any money in a savings account? You can tap into a few alternative options, which might have a higher interest rate.

Higher-Yield Money Market Accounts

One of the simplest alternatives to depositing money in a traditional passbook savings account is to get a money market account. Money market accounts offer a higher interest rate than standard savings accounts and also offer limited checking services, such as between five and 10 checks. Banks may offer 0.25% interest rate on a money market account.

Note that money market accounts usually have other restrictions:

  • A minimum opening deposit amount or
  • Minimum balance requirement (some banks also charge a penalty fee)

Look for restrictions and fees that may occur with your account.

Certificates of Deposit (CDs)

You can tap into a CD if you don’t need your money for a year or two — or longer. The higher the interest rate the longer you have it in. However, your money gets locked up if you opt for a CD and you’ll pay fees and penalties if you take your money out.

According to Bankrate, 0.21% was the national average APY rate for a one-year CD (as of January 2021). Two-year CDs offered as high as 0.95% in the same time period.

Choose an Online Bank

Online banks usually offer higher interest rates on savings accounts because they don’t have as high of overhead as brick-and-mortar banks with physical branches. You might also want to check to see if a credit union in your area offers higher interest rates on savings accounts — they usually due to their nonprofit organization status. You may gain a few tenths of a percent in your imply by opening a savings account at a credit union rather than at a traditional bank.

Put Your Money in the Right Places

Whether you want to save for college or save for retirement, UNest can help you. That’s why we want to offer you the best way to afford college for your child with as little as $25 per month.

Far better than stuffing college money in a savings account, UNest offers you a way to invest in one of five portfolio options, ranging from very conservative to very aggressive. This includes several age-based options that start at a more aggressive level and become more conservative as your child gets older. All of UNest’s portfolio options invest in low-cost ETFs.

Melissa Brock, founder of College Money Tips and Money editor at Benzinga, spent 12 years working in college admission. She loves helping families navigate their finances and the college search process. Check out her essential timeline and checklist for the college search!


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