The average American family has $62,410 in savings accounts, according to the most recent data from the Federal Reserve’s 2022 Survey of Consumer Finances. The most recent Gallup survey found that 62% of U.S. adults invested in stocks, a 1% increase from 2023.
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While more Americans are investing in stocks, it’s challenging to determine when you should be saving compared to when you should invest your funds. Here we’ll explore how much money you should have in savings compared to how much you should be investing.
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How Much Should You Have in Savings?
As your funds reach your checking account, you’ll have to decide how much to leave in your savings account and how much you’ll invest.
Handle Your Checking Account First
Before looking into your savings, let’s address your checking account.
“I usually suggest keeping about one to two months’ worth of expenses in your checking account,” said Taylor Kovar, CFP and CEO of 11 Financial. “This way, you’re covered for daily expenses and any surprises that might pop up.”
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You’ll want enough funds in your checking account to handle your bills for the foreseeable future so you won’t have to worry about missing a payment or falling behind.
Cover Your Living Expenses in Your Savings Account With an Emergency Fund
“Keep three to six months’ worth of living expenses in a high-yield savings account,” said Tyler Meyer, a CFP and founder of RetireToAbundance.com. “This is your safety net for unexpected expenses or emergencies.”
Most financial experts agree that it’s critical to have an emergency fund with anywhere up to six months’ worth of living expenses covered just in case. The goal is to have these funds in a liquid account so that you have access to them if an unexpected expense or situation occurs.
“Keeping around two months’ worth of additional expenses in a high-yield savings account is a great rule of thumb,” Kovar noted. “That’s enough liquid money to cover the average American’s immediate emergency or vacation.”
While investing your savings is tempting, it’s important to remember the stock market can be volatile and you don’t want to be stuck scrambling to cover bills if your money isn’t easily accessible.
“If your job is unstable or your income fluctuates, you might want to lean toward the higher end of this range or even extend it to 9-12 months,” Meyer said.
Money You Will Need in Less Than Three Years Should Stay in Savings
“Keep the money you’ll need the next one to three years (like a down payment on a house or a vacation fund) in a savings account or short-term, low-risk investments,” Meyer said. “This ensures the money is accessible and isn’t subject to market volatility.”
If you have a wedding coming up or you want to purchase your first home, you want to ensure that these funds are growing at a decent rate without the risk of experiencing market volatility. Keeping your short-term funds in a savings account is helpful, as you never know what to expect from the economy.
How Much Should You Invest?
“I like to use a waterfall system where money ‘falls’ from one account to another as each fills up,” Kovar said. “After you’ve sorted your checking and savings, I recommend automatically investing any extra funds in the stock market. This approach helps you build your wealth while still keeping enough cash available for those unexpected moments.”
Once you have your emergency fund sorted out, it’s time to start investing your money so that your funds can grow and allow you to retire one day.
Money You Don’t Need Soon Should Be Invested
“Money you don’t need for at least five years can be invested for growth in stocks, bonds or other investment vehicles,” Meyer said. “A general rule of thumb is to have 70 to 90% of your long-term money in investments, depending on your risk tolerance and financial goals.”
Any money you won’t have to access for a goal soon, like a home down payment, should be invested to build a significant nest egg for your future self.
How Do You Decide?
Kovar stated that funds outside your checking account and emergency savings should be invested.
“Things can get creative once investments come into play, as you can start waterfalling from short-term investment accounts (vacations, kids’ college, etc.) to long-term investment accounts (retirement, buying a business, etc.),” Kovar said.
If you’re uncertain about deciding how much to save and invest, you have to consider your financial priorities for the short-term and long-term horizon. Any money you’ll need in the next few years or so should be left in savings, while the excess funds should be invested to ensure your bank accounts are growing.
“When determining how much of your money should be in savings versus investments, it’s important to balance liquidity with growth potential,” Meyer said.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planner: How Much You Should Have in Savings vs. Investing
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