When I got my first job I didn’t pay much attention to my savings. I spent everything I earned and if I was lucky I might have some leftover to transfer to savings. I always paid my bills on time so I didn’t think there was a particular amount I should have in savings.
As I got older I realized I was spending a lot of time working but had very little to show for it. Not only that but I had student loans that were growing every month despite my monthly payment. When I finally got my act together and paid off my debt for the first time I was able to think about, how much should I have in savings?
How Much Does The Average Person Have in Savings?
While there’s no record of how much the average person has in just their savings accounts we do know the median balance across all transaction accounts which include checking, savings, money market, prepaid debit cards, and the like is $5,300 per person.
That’s an 11% increase from 2016 when the median was $4,790. Considering inflation was only 2.13% for that time period, the savings rate is increasing at an encouraging rate. But the median savings varies across age groups. According to The Federal Reserve, median savings per age group in 2019 was:
- Under 35: $3,240
- 35 to 44: $4,710
- 45 to 54: $6,400
- 55 to 64: $5,620
- 65 to 74: $8,000
- 75 and Older: $9,300
The same data shows the top 40% of Americans all keep an average of over $10,000 in their transaction accounts. The wealthiest 10% of Americans keep around $70,000 in their accounts while the bottom 20% keep only $810.
How Much Should You Have Saved For an Emergency?
The median may be $5,300 but is that enough to have in savings?
Having money set aside for emergencies and other irregular or unexpected expenses allows you to make decisions in traumatic seasons out of a place of preparedness instead of stress. Your emergency fund can literally be the difference between a devastating financial catastrophe or a minor inconvenience.
At minimum you should have three to six months of expenses set aside for emergencies like unemployment, immediate medical expenses insurance won’t cover, or unexpected travel or time off for family emergencies.
Once you’ve saved your emergency fund you should also consider opening a savings account for sinking funds. Sinking funds are savings set aside for expenses you know you’re going to spend. They’re for the known where emergency funds are for the unknown.
Things like annual bills, medical bills under your deductible, or replacements and upgrades to your home appliances are all expenses you know you’ll have to make you just don’t know when. They’re expenses that can be intentionally saved for.
Look at the things around your home and the bills you pay once or twice a year and calculate how much you’ll need to save monthly for each so you can be prepared for the expense when it arrives. For example, say you know your water heater is old but you think it’ll last five more years. If replacing a water heater costs $2,000 then to be ready in five years you should start saving $33 per month for it in your sinking fund.
How Much Should You Save For Retirement?
Your savings for retirement are very different from cash in a savings account. The average savings account will return about .06% which won’t keep up with inflation. Meaning that if you save for retirement in a savings account, you’ll be losing money when it comes time to retire.
Investing is the best way to beat inflation and grow your money until you retire. And saving in tax-advantaged accounts like a 401k or an IRA will allow you to save on taxes that can help your money grow even more.
When it comes down to how much to save, online brokerage Fidelity recommends savings at least 15% of your gross earnings every year. But there’s actually a more precise way to calculate the exact amount you need to save to retire to your personal standard, it’s called the 25x rule.
The 25x Rule is a way to calculate your retirement saving goal. It’s based on a time-tested study in financial planning called The Trinity Study. The study showed that if you save the amount calculated by the 25x rule you can safely withdraw 4% to 5% of that amount every year and it’ll last you at least 30 years.
The calculation is easy. Simply determine the amount you spend on average every year or the amount you want to spend in retirement every year and multiply that number by 25. So if you spend $50,000 every year and want to do the same in retirement you’ll need to save $50,000 x 25 or $1.25 million.
It’s important to note that the 25x rule is more a “rule of thumb” vs a hard and fast rule. It’ll give you a goal and place to start your saving plan but you’ll want to readjust as the market changes.
Keeping Money in Your Savings Account vs Checking Account
You can’t go wrong when choosing to save money but you can optimize your savings by putting them in the right accounts.
Keep money you need for bills and regular spending in your checking account. You should have one to two months worth of regular monthly expenses in your checking.
You should have separate savings accounts for your emergency fund and one for your sinking funds. Keeping money you’re saving for short term goals in a high-yield savings account separate from your checking will help you not spend it impulsively.
Lastly, any savings for goals more than three years away can be invested. Retirement savings should be in tax-advantaged accounts like an IRA or employer sponsored plan such as a 401(k). If you know you want to save for a long-term goal like investing in real estate but you want the money before you turn 59 ½, consider investing it conservatively in a taxable brokerage account.
Wherever you choose to save, most of us could benefit from more in our accounts. So be diligent in cutting your expenses and increasing your income so you can reach your savings goals with ease.