How Much Money Should You Keep in Your Savings Account? Here’s the Sweet Spot

Your trusty savings account is an important piece of your financial puzzle. And if you’re lucky, you might face the question of whether you have too much money in it. Unfortunately, many of your fellow Americans are not so fortunate — research from The Motley Fool Ascent found that just 45% of us can afford a $400 expense with the money in our checking or savings accounts.

But let’s say that’s not you, and you’ve reached a point with your savings where you’re thinking about diversifying that cash. Here are a few notes on what money should be in savings — and where you can put any excess.

Consider your emergency fund…

First things first: You need emergency savings, and if you’re currently wrestling over how much money to keep in a savings account, start here. Most experts recommend keeping enough saved cash to cover three to six months’ worth of essential expenses, like your housing payment, car payment, utility bills, and groceries.

This money can help you cover an unplanned expense and even stand in for your regular income should you find yourself laid off from your job. You can calculate how much you might need by using an emergency fund calculator, or even just adding up your expenses manually and multiplying by however many months you want saved up.

That three-to-six-months’ figure is likely right for you if you have a traditional sort of job and another earner in your household. But if your employment situation is a bit more unique or you have dependents and no additional income earner, you might want to aim higher.

…and short-term goals

Your savings account is also the easiest place to amass cash you’ll need soon. Planning to buy a house in the next year or so? Or getting married and taking a sweet honeymoon? The money for those endeavors is best kept in your savings account.

Consider keeping money for any bills or purchases that must be saved for (perhaps some dental work or a new set of tires for your car — not fun but necessary) in savings, too. You might wonder how best to manage all these different pools of money in a single account — after all, you don’t want to accidentally spend tire money on a new TV. Open the right kind of savings account and you won’t have to worry.

Namely, you want an account that offers savings buckets. My online savings account has them, and parceling money into these sub-accounts means I can easily set goals and check progress for my emergency fund, quarterly tax payments, vacation fund, and more.

Where should the rest of your cash go?

To answer this question, you need to consider your needs and timeline for cash beyond what you need for emergencies and short-term purchases and bills. You have several options that can protect your money and help it grow for the future.

If you have money you’ll need within five years that’s earmarked for a specific goal with a specific timeline (and you’re not actively saving more toward it), a certificate of deposit (CD) could be a smart idea. CDs are benefitting from the same higher federal funds rate as savings accounts, but once we get those promised rate cuts, CD rates are likely to fall. Now could be a great time to lock in a rate on a longer-term CD based on your goal timeline.

If you have saved cash for long in the future (perhaps retirement or college for your young children), consider investing it. The stock market has returned an average of 10% annually over the last five decades — that accounts for all years, both good and bad.

So if you can commit your money to a long investing timeline, you’re more likely to come out ahead. And if you’re saving for retirement, an individual retirement account (IRA) — be it Roth or traditional — can save you on taxes either now or in the future.

Now that you know what money belongs in your savings account, you can take action. Calculate how much your emergency fund should be, decide how much you need saved for near-term goals, and find a great home for any extra savings above those amounts.