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How Much Should I Have in Savings?

Money, money, money, money . . . money. Two things we know about the stuff: We should have some of it and be good stewards of it (no matter how much or how little we have.)

But how much do you really need to keep in your checking and savings accounts? Between your emergency fund, all your sinking funds and retirement savings, it can get pretty confusing. So, let’s break down the details and answer that nerve-wracking question keeping you up at night: How much should I have in savings anyway?

How Much Money Should I Keep in My Checking Account?

Okay, let’s go ahead and clear up a big misconception here: When we talk about having a zero-based budget, that doesn’t mean your bank account needs to have zero dollars in it. Don’t do that! You’ll get slapped with an overdraft fee, and nobody likes those suckers. Having a zero-based budget just means your income for the month minus all your expenses should equal zero.

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Your budget doesn’t need to be an elaborate Excel spreadsheet that only someone with a PhD in mathematics can understand (but if that’s you, more power to you!). When you’re doing a zero-based budget each month and telling your income where to go, you’re giving every single dollar a name and assigning it a job to do. You’re making your hard-earned money work for you instead of against you! Our budgeting app, EveryDollar, makes it simple and straightforward to plan where your money is going each month.

So, to recap: Don’t take your checking account down to zero, okay? Instead, be sure to leave a buffer in there. Now listen, that buffer doesn’t need to be $3,000, but it should be something that makes you feel comfortable without being tempted to overspend willy-nilly. For some people, that’s $50. For others, it’s $250. The important thing here is that whatever the number (within reason), it gives you peace of mind.

How Much Should I Have in Savings?

Alright, pump the breaks. Before we can even talk about savings, we need to get something else out of the way first: debt.

If you have $8,000 in your savings account but $12,000 in credit card debt, do you know what you really have? A negative net worth of -$4,000. It’s sad but true—if you’re $12k in debt, that eight grand sitting pretty in your savings account isn’t doing you any favors. And heck, it isn’t even really yours either. As long as you owe money to someone else, that beefed-up savings you’re so proud of doesn’t really belong to you.

Then how much should I have in savings, you ask? If you have debt hanging over your head, you need to take your savings down to $1,000—we call this a starter emergency fund—and throw the rest of the money at your debt.

We won’t sugarcoat it. Watching a lump sum get yanked out of your savings like that hurts like a kick in the teeth. That’s what debt does: It steals from your future and keeps you stuck paying for the past.

Don’t continue to stay in debt, only making minimum payments and racking up massive amounts of interest when you actually have the money to move the needle.  The faster you pay off your debt, the less interest you’ll have to pay in the long run—and then you’ll be free to rebuild your savings!

Now we know you’re wondering, how much should I keep in savings if I don’t have debt? Keep reading and we’ll dig into all the different types of savings you need.

How Much Money Should I Keep in Emergency Savings?

Your emergency savings account is going to look different depending on your income, your situation and where you’re at in the Baby Steps.

If you’re just getting started with Baby Step 1, the answer is simple: You only need $1,000 in your starter emergency fund before you move on to Baby Step 2 (paying off all debt except the house).

Nope, you can’t get by with only saving $800. And no, you don’t need to bump it up to $2,500 before you move on to start paying off debt. Just 1,000 George Washingtons—that’s all. The only exception here is if your income is under $20,000 a year. If that’s the case, all you need is $500 in your emergency fund.

Once you are debt-free and ready to start Baby Step 3, you’ll focus on saving your fully funded emergency fund. This is where you bring out the big guns. The goal here is to save up enough money to cover three to six months’ worth of expenses.

Now remember, this number is going to look different for everyone. The easiest way to figure it out is to ask yourself this: If I was out of work, how much money would it take to get me through three to six months? Think of things like the necessary, regular expenses you have (food, housing, utilities, transportation, etc.), and not the $400 you’d like to spend on a free-for-all shopping spree—that doesn’t count.

One final note: Don’t keep your emergency fund in your savings account. Yes, you want to be able to access your money quickly and easily, but not too easily. The best thing to do is put that emergency fund in a money market account. Most of them will give you a debit card and checks to use—that way you can get to it when you really need to (keeping it “liquid”).

And don’t worry about how much interest the account gives you—your emergency fund is not an investment! You don’t need to be worried about the rate of return here. That money isn’t there to make you money. It’s there to act as a safety net to cover your back when an emergency hits.

What’s the Difference Between a Sinking Fund and an Emergency Fund?

We’re glad you asked! You might think they’re the same thing, but they’re not.

A sinking fund is a separate savings that you use for any expenses you have coming up. If you know you need to save up $60 for that snazzy haircut you get every three months, then put away $20 each month into your hair sinking fund. You’re saving up for it over time and making an expected expense easier to swing.

An emergency savings fund is a place to park your money until an emergency happens. You know, that thing you used to grab a credit card to cover? Yep. Having an emergency fund turns the unexpected emergencies of life into just a minor inconvenience. 

How Much Money Should I Keep in Sinking Funds?

We’re big fans of sinking funds around here. Car need a tune up? There’s a sinking fund for that. Saving up for Christmas? Guess what, you need a sinking fund. Just bought a home and know you’ll need to do repairs eventually? Yep, make a sinking fund for that too. Basically, anytime you have a known expense coming up, you can use a sinking fund to save up for it over time.

Remember, a sinking fund isn’t the same thing as your emergency fund. The emergency fund is there as a buffer between you and the unexpected, and a sinking fund is how you save up for the expected.

How Much Money Should I Have in Retirement Savings?

Before we tackle this one, a quick reminder: Don’t contribute to your retirement savings until you’re out of debt (everything paid off except the house).  

Alright, now let’s talk about what you’re really asking here: How much should I be saving for retirement? Good question! We recommend putting away 15% of your household income into your retirement savings. What does that look like in real life? If your household income is $80,000, then you need to be putting $12,000 toward your retirement savings every year.

So, how the heck do you do that? First things first—max out your company 401(k) and make sure you’re taking advantage of the full company match! You can invest the rest into Roth IRAs.

How much should you keep in your retirement savings, you ask? The sky’s the limit on this one! Fill ‘er up! The more you save now, the more money you’re going to have when you hit retirement. Not sure how much money you need to fund your dream retirement? Check out our free R:IQ tool to help you learn exactly how much you need to save up.

It’s Time to Make a Budget

The key to winning with money starts with making a budget. Before you can ever begin to save a dime, you need to know how much money you’re working with each month. Once you have your budget set, you can tell your money exactly where you want it to go.

Feel the power yet? You’re in control of your budget and making your money behave. Yes, you. So, do something! Start with the premium version of our practical budgeting tool—EveryDollar. Then add in the teachings you need to budget your absolute best. You get it all in your free trial to Ramsey+. So, try it out today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.