How to Get the Most Out Of Your Savings Account [Video]

by Michelle Smalenberger, CFP® / September 12, 2022

Do you tend use your savings account to hold onto cash when you are uncertain about what is going to happen?

Sometimes parents hold onto things from a first child because they don’t know if they’ll have a second child.  After all, you don’t want to rebuy those same things.  We also tend to hold onto cash when we aren’t quite sure what is going to happen ahead. 

Today we talk about the cash we are saving, savings accounts, how much we should have, why we save, and other important information about savings’ accounts.  

Why do you need a Savings Account? 

First, let’s discuss money we have in savings accounts.  The definition we are going to use is this: money that’s liquid and accessible when we need it.  These are the two things to keep in mind today as we talk about savings.  If you think you have a savings account, this is what would define them. It’s liquid and accessible anytime.

Why do we even need to have a savings account?  The main reason is for any unexpected expense or income loss that might come up.  For example, consider a job loss.  This is unexpected.  We hope we keep our jobs for as long as we want them, but there are times when an employer lets us go before we are ready.  These savings can carry you for that time to your next job.  Another reason could be an emergency.  Maybe something comes up like an accident and you need to quickly handle it.  We need to make sure we have money ready.  Even when something like an appliance breaks down, we need money for the unexpected.  We know things are bound to break, so we could be prepared for the unexpected. And when the unexpected happens your money needs to be easily accessible. 

How Much Should You Save? 

Now you’re probably wondering how much you should keep in savings.  And this is one of the main things I want to cover today.  Today, we notice people are keeping more in their savings accounts or cash than they normally do.  This does make sense because the economy is uncertain, the market is volatile, and people aren’t confident what will happen ahead.  We see this more as we begin to work with new clients.

The 3 to 6 Month Rule

For the actual amount to keep in your accounts we use the 3 to 6 month rule. Essentially, this will help you figure out how many months of income you should have saved.  Keep 3 months in your savings account when you have two income earners in your household.  Keep closer to the 6 month amount when there is only one income earner in your household. 

Think about this for a second.  If you have two people in your household working, it’s more unlikely, even though it could happen, that both of you lose your job at the same time.  Because there would always be one income coming in, then you need a smaller amount of savings to offset the lost income. The 3 month time period gives the other person enough time to get back to earning income.  For a single income household that person may have a higher paying job and six months allows more time to find a new opportunity.  You want to allow more time so there is enough money to support your family in this case. 

How Much Is Too Much? 

Today, it’s not uncommon to see up to six or 12 months of cash saved.  Now this isn’t a bad thing. It’s okay to keep more than 3-6 months.  But, what we want to be careful of is the FDIC insurance limit of $250,000.  You may think that’s a lot of cash, and it is, but I just want to remind you that it’s more common than you think to see this large balance.  You could have an account above $250,000 because you just sold your home; or you are hoping to buy a home.  Timing can affect the amount of cash sitting in your account.  It can be temporary.

This is why it’s important to always make sure this $250,000 is not only at one financial institution.  FDIC Insurance only covers up to $250,000 per person, per financial institution.  This means if the bank goes bankrupt, they have insured that amount of money.  If you have a bank account with two people listed then each person will be insured for $250,000, for a total of $500,000.  Be sure you watch these limits because today there are circumstances that could cause you to have too much in cash.

When Should I Fund My Account? 

Now you might be wondering, or maybe you’ve already figured out, when you should have your savings account funded.  And that answer is: always!  You always want to have this step done.  It’s one of your first, most basic steps of managing your finances.  As you earn money, you should be setting some aside so you have money for unexpected reasons.  You don’t want to sell investments or borrow money for this reason.   

What Should I Look for in a Savings Account? 

Now that you have this large amount of cash set aside for whatever the need, we want to make sure that you are earning as much as possible.  I know this is going to sound strange that I am this excited about this interest rate, but today you can get 2% per year in your savings accounts!  Read more about the impact of higher interest rates here!  I want to be specific, because this is where you need to be very careful and pay attention to what your savings accounts are earning.

For example, we are going to think of money market accounts or an online savings account.  These are typically accounts that are going to pay you a higher interest rate.  These might be accounts such as Ally Bank or CapitalOne 360.  I just wanted to give you these examples so you have a couple to actually look for but there are others, too. 

We expect rates to continue rising.  You want to choose accounts that keep up as rates rise.  As rates go up, you earn more.  And you won’t have to move it between accounts to earn the most.  So look at your most recent bank account statement.  Just because you have a savings account at your bank doesn’t mean you are earning the high rates you could be.  Some banks are still paying .01% annual interest for savings accounts.  Check; and keep checking to be sure that large balances of savings are earning as much as possible. 

Next Steps for Your Savings Account

If you want to learn more about interest rates, inflation, or saving strategies, start here! Or if you want help sorting out your finances, including your savings, read about how we help you plan

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