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 Motley Fool picks. 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!