We all know that savings accounts don’t give a very good return. On the other hand, your money (at least up to the amount the FDIC will insure (currently $250,000 per account) is completely safe there.
This makes traditional savings accounts an excellent option for emergency funds, but little else. Here’s why a normal passbook savings account works for your emergency fund:
- Your money is safe. This is true up to $250,000, as mentioned. And it you have more than $250,000 in a passbook savings account, you’re nuts anyway.
- Your money is readily available. You don’t have to do anything special to get to your money, and you’re not generally restricted concerning how often or how much you can take out. Let’s hope you don’t have to clean your emergency fund out all at once, but if you do, it’s better to have the money on hand.
There are a number of reasons why a passbook savings shouldn’t be used for much else, but they all boil down to one major concept: You don’t get a good return on your money in a savings account. This is true even with high yield savings accounts, in most cases.
So, how much should you have in your savings account? It really depends on your lifestyle. If you have debts that you’re working on paying off (and who doesn’t?), it really doesn’t make sense to have much more than $1,000 in a savings account, unless your lifestyle leads you to believe you are highly likely to have expensive emergencies on a regular basis. Frankly, it doesn’t do you much good to save money if you’re only going to shovel larger amounts of money out to the credit card companies.
Most financial experts recommend getting out of debt, of course. While they recognize the need for certain long term debts (like a mortgage), they recommend paying off personal loans and credit cards (along with their high interest rates) before building up savings.
Once you are out of debt, there is a wide divergence of opinion regarding how much money you should keep in a savings account. Advice ranges from 1 months’ income to 8 months’ income. Most experts recommend between 3 and 6 months’ income. Any more than that, and you should consider putting your money to work for you some place where it will earn you a better interest rate.