Posted in  News   on  July 31, 2019 by  Brandon Young0
how much you should save and the risk of over-saving

last updated August 3rd, 2021

I will break down how much you need for your savings and emergency savings account, but also talk about the risk to over-saving.

How much should I have in my emergency savings account?

This is a simple answer, but takes a bit of a calculation. You will want to make sure you have a proper budget in place. Once you have tracked down all of your necessities, you will simply multiply that number by 3.

For example: I make $3,000 a month after-taxes and spend $1500 on necessities (what I need to get by for the month). I would multiply the $1500 by 3 and end up with my number, $4500. This would get me by for 3 months if my next paycheck were my last. It takes approximately between 43 days-76 days to find a new job. 3 months of emergency savings would be enough in this scenario.

If your job is on the higher end of the spectrum, Mid-Level to C-Level, you should have six months of living expenses as the vetting process for those positions are longer.

I don’t feel comfortable with only 3 months of expenses in my savings, it’s too low.

The good news: that means your expenses are low too.

The bad news: there really isn’t much bad news with having really low expenses. Just make sure you have a plan in place for the remainder of your money.

I have more than 3 months of expenses in my savings, what should I do?

Anything more than 3 months of living expenses should be used for

  1. Pay down debt. Start chipping away at those credit cards, student loans and vehicle loans.
  2. Save for other immediate goals such as home purchase, home remodel, vacation, vehicle or any other large purchase. You do not want to invest any money in the stock market that you plan on using within two years.
  3. If your debt is under control, you have saved for everything else, then what you have is called “investable assets”. It’s just another way of saying you have a healthy financial plan and should start focusing on growing your money.

What is the risk to over-saving?

When you have saved too much, you run the risk of “not taking on enough risk”. Meaning your checking or savings account where you currently have your money parked, may only be yielding you .10% interest when even in a conservative bond portfolio you could be looking at 3%-5% in some cases or an aggressive stock portfolio could be yielding you 7% or higher depending on your strategy.

For example: You have an additional $10,000 of investable assets tucked away in a savings account. Even with a higher tiered interest rate, you may be only earning .25% rate of return. If you continue to contribute $100 a month to the account, in ten years you would have $22,403.

If you took that $10,000, continued to contribute $100 a month and invested in a conservative bond portfolio around 4% interest, you would instead have $29,633.

With that same $10,000, continued to contribute $100 a month and invested in a growth portfolio around a conservative 7% interest, you would instead have $37,405.

In this scenario, by leaving the money in your savings account you would be giving up a lot in potential earnings. Although you cannot invest more than the annual maximum to a retirement account, with the right strategy you can use the funds as a supplement to your retirement.

simple and easy.

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