How Much Money Should You Have In Savings Before You Invest?

By: Josh Rodriguez

October 7, 2013

How Much Money Should You Have In Savings Before You Invest?

 

Hey everyone, Josh here again for another Monday Money post! Last week, I talked about what I learned while investing over the past month or so. One of the main points was that due to inflation, when my money is sitting in a financial savings account, I'm actually loosing purchasing power. However, if I was to invest that money and earn a high rate of interest (such as with Betterment), I could be earning purchasing power. At the end of the article, I came to the conclusion that I was going to put all of my savings into investments. Of course, I asked you, my readers what you thought about that.

 

And, that's where my plan got derailed. In comment after comment, you all showed me the error in my thinking. See, I figured that if I'm losing money by keeping it in savings, then it would be better to keep all of my money in high return investments. Then, I read the comments that brought a key point up. High yield investments are also high risk. So, if I put all of my savings into high yield investment accounts, there's a chance that I may loose all of my liquid funds if the market takes a plunge.

 

That being said, quite a few of you said that you set a specific cap for your savings account and keep it as close to that cap as possible. When cash bleeds over the cap, most of you put that money into investments and allow it to work for you. That way, you're not losing too much to inflation, and, in the unfortunate case that the market takes a turn for the worst, you still have liquid assets available in savings for emergencies.

 

So, this brings up another thing that we really need to think about. How much money should be kept in a savings account before you invest in stocks, mutual funds, or the like? Obviously, we don't want too keep too much money there and fall prey to inflation. On the other hand, we don't want to keep too little money in savings, and not have enough money available should an emergency arise.


 

Keeping this issue in mind, I've spent the spare time I've had in the last week or so jumping from one blog to another to see what the pros are saying with regard to how much money should be kept in savings. In my reading, I've come across articles that give flat amounts like $5,000 or $10,000, and I've come across articles that give ideas like, “Save enough to keep you afloat for 3 months if something were to happen”. Those tend to range from 3 months worth of income to 6 to 9 and even some say to keep a year worth of income in savings. But, what's the best way to go?

 

Well, when it comes to questions like this, there is no such thing as a one size fits all answer. Although, I would say not to go with a set amount like $5,000 or $10,000. This is because we all have different income levels. $10,000 may seem like a lot to me, but to you, it may be a drop in a bucket! That being said, I think it's best to go with saving up enough money to get you through for several months.

 

How many months worth of income you decide to keep in your savings account is really up to you. Much of your final decision is going to be based only personal preference. No matter what I say here, you're going to need to feel comfortable with the liquid assets you have available to you. However, I can say that it's a bad idea to keep less than 6 months worth of income in savings. Anything over that should be fine.

 

The reason I say half a year's worth of income should be a minimum is really based on survival after being laid off. I've read several stories that talk about people who were laid off. They had a few months worth of income saved up, but it wasn't enough. These people took 6 months or so to find a job, but only had the money available to survive for 2 or 3 months. In these cases, these people relied on family and friends to get through the rest. Because I'd never want to be in that position, and I'm sure you wouldn't want to either, I strongly suggest keeping at least 6 months worth of income in a liquid savings account. Anything over that limit should be invested in a more high yield option.

 

Now I'd Like To Hear From You

 

Thanks for reading. As always, this column is an open forum and your comments are welcome. That being said, if you can point out any errors in my thinking here, feel free to do so in a comment below. I love to learn! Also, I'd like to know what your savings cap is. Don't worry about giving a dollar amount, but if you'd share how many months worth of income you put in savings before looking for high yield opportunities, I'd greatly appreciate it! Thanks again everyone!

About the Author:

Joshua Rodriguez is the owner and founder of CNA Finance and Alpha Stock News. His experience in market analysis is vast, earning him positions as a contributor to top websites like Equities.com, Benzinga, and several others. When he's not working, Josh enjoys time with his wife, 3 year old daughter, 8 year old son, and five large-breed dogs who tend to keep his schedule booked. To get in touch with Joshua, contact him on Twitter or email him at [email protected]

29 thoughts on “How Much Money Should You Have In Savings Before You Invest?”

  1. Avatar
    Mark Ross | Think Rich. Be Free.

    Yes. It really depends upon the individual how much he or she would need but having more than 6 months of monthly expenses on your savings account will make you feel more secure than having only 2 to 3 months worth of expenses.

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    Great article. I think a key consideration should also be how you’re spending your money. If a large portion of your money is going to things you can’t cut back on too much (mortgage, student loan, insurance), then it’s imperative to have a few months of savings. But if a good portion of your money isnt tied up (entertainment, eating out, travel), then maybe you don’t need so much in savings and you can invest a little more freely.

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    It also depends if you have a spouse/partner with income. Because we save ~50% – 60% of our income, we could go a real long time if one of us got laid off. Because we work in different fields, I think we can go much less than 6-months of expenses. It also depends on your credit score and if you’re able to pre-qualify for a HELOC.

    That being said, we have a ridiculous amount in savings that I’m trying to DCA into investments now after “seeing the light” when it comes to stock market returns over the long run.

  4. Avatar

    As you mentioned, the quantum of money in savings needs to be determined on a case-to-case basis. Single people can do with less while people with families will need more.

    As for me, at a bare minimum I ensure that I have enough to pay my rent, groceries and phone bill. I would love to add more but as a student I can’t focus on building a savings fund whilst I have education loans to pay 🙁

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    I like to have around 6 months of expenses saved up just in case. I definitely have a threshold I like to keep slightly above just in case of an emergency. There’s not much I could cut back on save for my cell phone bill that I haven’t already cut back on. I do think it’s a smart idea not to invest all your savings, though.

  6. Avatar

    Good question Josh.

    As investment is typically a medium to long-term event, the worst thing is investing your capital, suffering a reduction in asset values, then running out of money and being forced to sell at the bottom.

    The answer depends on several factors, including;
    – The stability of your income. Multiple income streams are more secure than just one job.
    – How long it would take you to replace any of your lost income streams.
    – The percent of your income that you normally spend. The more you spend, the bigger buffer you’re likely to need.
    – The ratio between essential and non-essential spending. As Syed mentioned, if most of your expenses are essential, it can be hard to cut back on your spending during a crisis.
    – The type of investments you make. Highly volatile investments will require a larger safety net.
    Ultimately, the answer will be different for everybody.

  7. Avatar
    Todd @ Fearless Dollar

    Josh–great thoughts!! What do you think is a wiser initial investment—bigger down payment on a home or in your 401k?

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    Christine @ ThePursuitofGreen

    We like to keep about 3 months of costs in our emergency fund. Since we’re looking to buy a house we’re boosting that to 6 months now. Even after we have that amount though we’re going to keep on saving and then start investing a different amount. That way we have savings we can touch for vacations and large purchases, some investments for making some money, and then an emergency fund just in case!

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    I think it all depends on your situation and what helps you sleep at night. With our rental, I probably keep more than I should because I’m afraid of a big repair. I don’t think my husband and I would lose jobs at the same time, so we could probably get by on one income if we cut it to bear bones. Once the house is paid off, no problem.

  10. Avatar

    Once I had 8 months emergency fund set up, I started investing outside of retirement accounts. Mostly all of my savings would go into the market, unless I wanted to save for something in the near term that I would soon need the money.

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    I would keep 6 months of expenses if I was debt free. Currently, I keep about 3 months of expenses in savings. I haven’t started investing much yet, except a little in retirement. I can’t wait to change that.

  12. Avatar
    Bryce @ Save and Conquer

    We have a year’s worth of expenses in 12 5-year CDs that have a 60-day interest penalty for early withdrawal. They are earning 2% interest. That is our emergency fund. We also keep about $6k in our checking account as a monthly expense buffer. Any money deposited in our checking account (e.g., paychecks) that goes over $6k gets moved to a taxable brokerage account and is invested according to our asset allocation. This is over-and-above our retirement savings that are automatically withdrawn and invested from our paychecks before we see them.

  13. Avatar

    Hi, first time commenting here. Back in 2009 both my husband and I lost our jobs and we had over 2 years of emergency savings. We were saving for a house also but that was all put on hold until we were able to stabilize our incomes again. I was greatful for having that extra money in savings. I would feel comfortable with at least 8 months of emergency savings.

  14. Avatar

    We always plan on having 3-6 months of emergency funds set aside in a basic savings account. I don’t mind if inflation is eating into that, as I consider that insurance for negative life events. I won’t dip into that for any investment.

  15. Avatar
    kelly @stayingonbudget

    Yeah, I tend to think 3 months is a little on the light side for emergency funds. I also know a couple of things go wrong and the fund could be gone just when you need it the most…so I lean towards 6 months at least.

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    KK @ Student Debt Survivor

    I have about 6 months of expenses saved for an emergency fund. I wouldn’t have invested before then, because if I needed that money for an emergency, I’d want immediate access to it.

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    My opinion on the emergency fund differs to many others. I think that the loss that you make over the long-term by keeping this money in the low interest rate emergency fund (ESPECIALLY if you have debt) outweighs the risk that an emergency means you need to dip into your investments.

    Personally, my monthly expenses are on a credit card which I pay off automatically in full each month after through my salary. I then keep one month’s expenses in a savings account. Other than that, all other money is invested.

    If I incur an emergency, I know I then have to withdraw some investments, which may have lost value since I invested. However, I estimate that this risk is lower for me than losing the 5-10% every year on my emergency fund.

    The emergency fund, in my opinion, is a safety blanket. Some people want more as they are risk adverse and it make them feel safer. Other people (like me) embrace risk for higher returns.

  18. Avatar
    Tammy - Loans and Lifestyle

    I think you need to keep as much as needed to partially compensate any losses you may face in your investment. I know people who were so certain about certain investment opportunities that they placed a huge chunk of their life savings in the company. They ended up with very little after the project failed. It’s always better to be conservative in these cases.

  19. Avatar
    The College Investor

    Depends on our lifestyle and how many people are in the family. We must always have savings and emergency fund to fall back on in case our investment did not go as planned and we must only invest what we can bear to part with, because the moment we put our money in an investment, we lose full control of it.

  20. Avatar

    We have only a couple thousand in savings account. Everything else gets invested. We don’t have rental real estate so all our investments are liquid to the extent that we can sell stock or bonds and have the proceeds in a few days.

  21. Avatar

    I have no money for emergency. I am all invested. I am not sure how much I believe in emergency fund unless you are self employed and you have to plan for it. I have investments and I cannot stand not seeing my money work for me.

    A leaky roof should not require using the emergency fund as you should be aware and so forth. That’s what home ownership is about.

    Everyone’s situation is different and it’s really about your situation and many times, it’s about your employable skills.

    What’s more important in my opinion is to NOT increase your life style as your income grows as you become chain to higher and higher income. That’s when trouble can come in because you will look towards debt you can service.

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    I think it also depends on age and on the type of work you do. A loss of a job when you are in your 50’s can be permanent, whether you think so or not. Also, losing a job in the high paying manufacturing companies that are closing may take folks a while to figure out there are not many high paying jobs around to have. Unless you are in a job that is highly sought after, you may need to exchange your career for another at a much reduced pay. 3 or 6 months savings won’t last long.

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    Michelle's Finance Journal

    We only have very little saved right now for small emergency like car repairs. But since we have pretty big debt load, we’re focusing on paying off debt right now. We’ll gradually increase the savings and once we’re debt free, we’ll probably keep 3 month expense amount. Once the house is bought, probably increase it to 6 months.

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    Emily @ Urban Departures

    I agree- there is no “one size fits all” emergency fund and there are a myriad of factors, including circumstance, personality types, and spending habits. Currently my husband and I have three months worth of “necessities” (mortgage, food, essential bills) saved up. However, we’re thinking of reducing the EF and investing money; kind of opposite of what is recommended, but I share the same line of thought as moneystepper above.

  25. Avatar

    Josh,

    My views on this are a little bit different…I think its important that invest as much as possible in safe, but liquid assets. For example if you have savings bonds or high quality corporate bonds, your assets are as good as cash.

    One thing you want to avoid is keeping a lot of your cash on the sidelines doing nothing when market conditions and opportunities would dictate that you should be invested.

    Thanks,

    James

  26. Avatar

    Hi Josh,
    Great article!!!
    My OCD-ish personality requires that I point out that “loose” means something that isn’t tight. I think you meant to use the word “lose”, as in something that is lost (in this case, cash).

  27. Avatar

    Depends on where in the investment process you are. My advice is to keep 1 month’s expenses in a savings account. The next step would be to gradually invest in Series I savings bonds so you have some inflation protection and money you can withdraw with penalties after a year. Students should have 3 months expenses in liquid assets. Families should have at least 6 months.

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