A savings account is the first step of your financial journey. It is important to have a savings account to avail multiple services and accessibility of your funds when in need. Besides keeping your funds safe, your savings account helps you earn interest on your deposits. However, it is generally recommended not to park your entire funds in your savings account but invest them for maximising your income.

Finding the right balance between saving and spending is crucial for a secure financial future. One of the key aspects of managing your money is determining how much you should keep in your savings account. While the answer may vary based on individual circumstances, financial goals, and economic conditions, there are some essential considerations to guide your decision.

Adhil Shetty, CEO, Bankbazaar.com, says, “Keeping your money in a savings account is a reliable way to ensure its safety and easily access it when needed. It’s a great option for short-term goals, emergencies, and everyday expenses. However, savings accounts don’t typically offer high interest rates. If you want to accumulate wealth and achieve your financial goals, it’s important to diversify your investments and create a portfolio that aligns with your short-term, mid-term, and long-term financial needs.”

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Building an Emergency Fund

One of the primary purposes of a savings account is to establish an emergency fund. Financial experts recommend setting aside three to six months’ worth of living expenses in a readily-accessible account. This safety net provides a cushion in case of unexpected events, such as medical emergencies, job loss, or major repairs.

Short-Term Goals

Saving for short-term goals, like a vacation, a down payment on a home, or a major purchase, is another valid reason to keep funds in a savings account. Assess your specific goals and their timelines to determine how much you should allocate. Having a dedicated account for these goals prevents you from dipping into your emergency fund or long-term investments.

Monthly Expenses and Cash Flow

Consider your monthly expenses and cash flow when deciding how much to keep in your savings account. Calculate an amount that covers your essential costs, such as rent or mortgage, utilities, groceries, and insurance premiums. Maintaining this buffer ensures you can meet your obligations even if unexpected expenses arise.

Potential Returns

While a savings account offers security and accessibility, it’s important to recognize the opportunity cost of keeping excess funds there. The interest earned in a savings account is typically lower than that of other investment options, such as fixed deposits, mutual funds, or stocks. Evaluate your financial goals and risk tolerance to strike a balance between safety and potential returns.

Keep in Mind Inflation

Inflation erodes the purchasing power of your money over time. The interest earned in a savings account may not keep pace with inflation, leading to a decrease in the real value of your savings. To combat this, consider investing a portion of your funds in assets that offer the potential for higher returns, such as low-risk investments or mutual funds.

Assessing Your Financial Situation

When determining how much to keep in your savings account, assess your current financial situation, including your income, expenses, debts, and future goals. If you have high-interest debts, prioritize paying them off before allocating a substantial amount to your savings account. Once you’re debt-free, you can redirect those funds towards building a robust savings cushion.

Shetty adds, “Financial circumstances change over time, so it’s essential to regularly review and adjust your savings account allocation. As your income increases, you pay off debts, or your goals evolve, your ideal savings account balance may shift. Stay proactive in evaluating your financial situation and make adjustments accordingly.”

By assessing your financial goals, monthly expenses and broader financial plan, you can decide how much money you must have in your savings account.