By: Dan Johnson, CFP®
When you login to view your bank account balance, is it something that causes you stress or do you feel comfortable when you pull up those numbers? Knowing the proper amount of money to have in your savings account can often feel like a difficult question to answer.
How do you determine what the correct amount is for your family?
Before you can figure that number out, it is important to understand what an emergency fund is, and what those dollars are being saved for.
An emergency fund is a specific dollar amount saved in cash that is easily accessible in the event your family loses a portion or all of its income. An emergency fund is the cushion that allows you to continue on with life as you know it, from a financial perspective, while securing another form of earned income to replace the lost portion.
It is NOT used for: vacations, car purchases, helping children pay for an expense they can’t pay themselves, the latest Xbox game, a day at the spa, a “great deal” on anything…you get the point.
A good rule to go by is having three to six months of non-discretionary expenses. Examples of non-discretionary expenses would be your mortgage, food budget, utilities, insurance premiums etc.
Any spending that is non-essential goes away until the family income is back in place.
For example: a family that spends $8,000 a month, of which $6,000 is non-discretionary, would want to have between $18,000 – $36,000 in their savings account.
Let’s hone in closer to the number that is right for you.
If there are two spouses that are currently working full-time with similar incomes, that family can go with the three month number because of the flexibility of having two incomes. However, if there is only one income earner in the family you would want to lean closer to the six month number since that individual’s salary is the sole source of income for the family.
Your savings account number can also be affected by a few other things such as: how easily you could get a new job in your industry if laid-off, your personal comfort level – if it just feels good to keep extra cash, and how well you currently handle your monthly budget.
What if you are cash heavy – can that ever be a bad thing?
If you are someone who tends to keep substantially more than this recommended amount in your savings account, you bring on different risk: inflation risk. This is why it is important to have an appropriate amount in your savings account in order to be protected but not overly cautious; thus losing purchasing power with your money.
As part of our regular cash-flow reviews with clients, we are sure to check-in on bank balances, and help you determine the amounts we recommend. Of course, if you ever want to have additional conversations around this topic, don’t hesitate to ask.
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.