Everyone has a theory about how much money they should have on hand. It is dependent on your budget. Money for fixed expenses, extras, and an emergency fund should all be kept in a separate bank account.
Perhaps you must reevaluate how much you think you should have readily available. Even if you’re prepared for the worst with savings, you may still learn from this experience and adjust your priorities accordingly.
Your financial plan is the first step. Not making a proper budget can leave you with no savings. Do not have a financial plan? You should make one immediately, or at least improve upon your previous planning methods. Some suggestions are provided below.
Your savings goals and current financial circumstances will determine how much money you should have stashed away. Starting with a plan and a budget is the first step. Both show you how to divide your income between fixed costs, variable costs, and savings for unexpected events.
How Much Money Should You Save
Let’s start with the tried-and-true 50-30-20 budgeting rule. Senator Elizabeth Warren first proposed the rule in the book she wrote with her daughter, All Your Worth: The Ultimate Lifetime Money Plan. Instead of trying to keep track of a budget with an absurd amount of lines, divide your cash into three distinct sections: savings, spending, and investing.
Fifty percent of the total is dedicated to fixed costs. Of course, it would be ideal if you never had to worry about things like water, internet, car, and mortgage (or rent) payments, but alas, the electricity bill cometh like the rest of your monthly expenditures. If you’ve already factored these expenses into your budget and determined they’re necessary, you don’t have much choice except to pay them.
Free Spending Cap
Anything goes in here (within reason, of course). You can spend the money on everything you like, not just what you need to survive.
Most budgets include food costs because there are many ways to approach them: eating out, cooking at home, buying store brands or name brands, buying a can of soup for pennies, or buying organic ingredients to produce elaborate meals.
Anything from going to the movies to buying a new tablet to making a charitable donation falls into this category. What to do is up to you. Though many “experts” in finance recommend setting aside at least that much of your earnings, some may dispute that this number is far off base.
Goals in Terms of Money: 20%
You’re setting yourself up for trouble if you aren’t investing aggressively for the future, such as by establishing an IRA, a 529 plan if you have children, and, of course, a 401(k) or another retirement plan. The remaining 20% of your paycheck each month should be allocated here. It would help if you secured this financing for your future. Investing accounts like traditional IRAs and Roth IRAs can be opened at most stockbrokers.
If you don’t already have one, you should prioritize putting this 20% into an emergency fund. Your take-home pay is the money you get to keep. Therefore, you should use that as a basis for the percentages in the 50/30/20 guideline.
Dave Ramsey’s System Is Yet Another Way To Manage Your Money. Although most people would divide their money in half, financial expert Dave Ramsey suggests a different approach. His suggested distributions are rough as follows (all stated as a percentage of after-tax income):
Ten percent of income was donated.
So, how much do you require? Individuals hold a wide range of perspectives. Financial experts generally agree that you should have six months’ worth of living expenditures in cash. If your monthly expenses are $5,000, you should have $30,000. Since the average person needs eight months to locate a new job, personal finance expert Suze Orman recommends keeping an emergency fund of that length.
Some financial advisors recommend keeping three months’ worth of expenses in cash. In contrast, others say it’s unnecessary if you have little debt, a sizable emergency fund, and enough insurance.
Most importantly, you should be able to get your hands on that cash whenever you need it. (And don’t forget that bank deposits are safe because of the FDIC’s insurance. When that time comes, you should start putting your money away for retirement and other long-term goals, preferably in an investment vehicle that will net you a higher return than a checking account.