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When the state of the economy is causing day-to-day costs to skyrocket, it’s all too easy to push your savings goals aside. We’ve previously covered the conventional wisdom for how much money you should keep in your different types of bank accounts, but how does that wisdom change when the economy is shaky? I spoke with WalletHub analyst Jill Gonzalez about how much money you should aim to have in your basic savings account before you start working toward other types of financial goals.
How to prioritize different types of savings
Last week we covered how much money you should have in your emergency fund these days (spoiler: the traditional rule of thumb may be three-to-six months’ worth of living expenses, but nine months might be a more apt goal in 2023). In addition to covering several months of essential expenses, your savings account is a place to back more long-term plans, like buying a car or planning a vacation.
Of course, there’s no one-size-fits all number for how much money is budgeted as your official “emergency fund” versus other types of saving goals, including retirement. The total amount that should be in your savings depends a lot on your goals. That being said, Gonzalez shares a sample strategy. First off: Prioritize your emergency fund. Once you’ve hit your emergency fund goals, Gonzalez advises “anywhere between 10-20% of your income should go to savings.” This includes retirement accounts.
With those bases covered, you can look into investing your money as well. Unlike saving, investing involves some level of risk with your money, but the returns can be much greater—here’s our guide to figuring out when you should choose saving versus investing your money.
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Keep saving, even when times are tough
Given the state of inflation, uncertainty in the labor market, and the looming specter of a recession: How are you supposed to make savings a priority? Gonzalez says that boosting your emergency fund is a good start to building out your savings accounts, not just despite the current economy, but because of it. In fact, Gonzalez points out that maximizing your retirement account contributions is another way to deal with inflation: “High yield savings accounts, with low or no fees are also a great choice now more than ever. Most of these are online accounts and you can open one in no time.” Here’s our guide to choosing a high-yield savings account.
Ultimately, Gonzales reminds us that “there’s no such thing as keeping too much money in savings,” as long as you also have investments and other types of accounts such as a 401(k) or an IRA.
