How Much Cash Should You Keep In Savings? (Plus Where to Keep It)

Cash to Keep in Savings

They say everyone should have three-to-six months’ worth of expenses in an emergency fund.

Unfortunately, if you follow this rule you probably have quite a bit of cash earning almost nothing in interest–and losing money to inflation. Where you save your money can be just as important as how much you have saved.

Here’s what you need to know about where you should be stashing your rainy day money:

Cash Savings at Home

Anyone who has lived through a major natural disaster understands there’s a reason for keeping some actual cash in your home. Having cash available to purchase supplies is an important part of disaster preparedness.

But even without a large-scale disaster, you may face some sort of personal emergency that would make it impossible to use your credit or debit cards.

Of course, there’s a reason why “keeping money under your mattress” is short-hand for poor financial management. It may be smart to have some cash available at home in case of emergency, but that should hardly be the only place you stash emergency money.

Not only is cash vulnerable to theft, but any money you have lying around is also losing value to inflation. Instead of earning you interest, cash at home is actually being eaten away by inflation.

How Much Should You Keep at Home in Cash?

Considering how vulnerable cash is to both theft and inflation, you probably shouldn’t keep more than $100 to $200 in cash at home. That amount should be sufficient to get you through the worst parts of an emergency without tying up too much of your emergency fund.

As for where you should keep your cash emergency fund, plan on getting a safe to use at home. Look for fireproof and waterproof safes that are either too heavy to carry or that can be bolted in place.

What About Your Checking Account?

Keeping a cushion of extra money in checking can prevent overdrawing your account. It can also provide you with peace of mind; that money will be readily available in an emergency.

In addition, checking accounts (along with savings accounts, money market deposit accounts, and CDs) are FDIC insured up to $250,000–which means your money is safe even in the event of a bank failure.

There are a number of problems with keeping a big chunk of your emergency fund in your checking account, however.

First, the majority of checking accounts offer no interest whatsoever. This means any money left in there is losing value to inflation, just like your cash at home.

Secondly, ease of access is also a potential problem with keeping emergency funds in checking. It can be difficult for many account holders to maintain the emergency cushion in their checking account without accidentally spending it.

How Much Should You Set Aside in Your Checking Account?

If you keep careful track of your finances, then you can afford to have a smaller buffer–between $250 and $1,000. However, if you don’t necessarily track every penny, you may want to keep a larger cushion.

Just remember that every extra dollar you keep in your checking account is losing value to inflation.

Resource: Free Online Checking Accounts–Stop Paying Bank Fees!

Okay, What About Your Savings Account(s)?

Savings accounts are the most common place to set aside money for an emergency fund. Not only do you earn a little bit of interest, they are also FDIC insured.

In addition, putting your money in a savings account keeps it out of sight, which means you are much less likely to spend it accidentally. But savings accounts are also relatively easy to access in the event of an emergency. So they offer the best combination of security and access.

However, the interest on savings accounts can vary, and none are currently very high. In some cases, the interest rate is so low that it doesn’t offset inflation–which means that savings accounts are not the end-all, be-all of emergency fund placement.

There are a number of different ways to put your money into a savings account, each with their own pros and cons:

Brick and mortar savings accounts

Every traditional bank and credit union offers some sort of savings account to customers. These accounts are convenient, and it is very easy to access your money from them. You can often withdraw funds from such savings accounts via your bank’s ATM, and you can generally transfer money to your checking account instantly.

The downside of these types of accounts is their low-interest rates and potential fees. Most brick and mortar savings accounts offer the lowest rates of any type of savings accounts and traditional accounts are most likely to charge fees.

If you choose this route, be sure to know the hoops to jump through to avoid the fees.

Online savings accounts

Because online banks do not have to maintain physical branches, they have lower overhead than their traditional counterparts–and that savings shows up in their higher interest rates and lower fees. This makes them better than brick and mortar banks.

Keep in mind, it can take up to three business days to access money from an online savings account. This means you cannot count on these funds in the case of a sudden emergency. But, if you are able to pay for such an emergency with a credit card, you can use money from your online savings account to pay it off.

Money market account

Money market accounts (MMAs) are a savings product that double as a checking account and their interest rates are much more generous compared to that of traditional savings accounts. You can find MMAs at both traditional banks and online banks.

Because these accounts work a little like checking accounts, your money is easily accessible in case of an emergency while still earning you a relatively high-yield.

FinTech apps

Savings and investing apps can offer you a fully 21st-century method of amassing an emergency fund. The options run the gamut from automatic savings to behavioral change. And the benefits and drawbacks for each specific app also vary widely.

In general, apps are the best option for any saver who wants to productively ignore their money while it grows. There are often more lucrative options for anyone who is more hands-on with their money.

How Much Should You Set Aside in Your Savings Account(s)?

Even the best high-yield money market accounts currently offer an annual interest rate of 2% or less. Inflation is currently 1.9%, which means your money is only truly earning 0.1% per year–provided you actually find an account with a 2% interest rate.

The national average savings account rate is as low as 0.06%–which means inflation will eat 1.84% of your emergency fund with every year that passes.

For example, if you have $10,000 in a savings account with a 0.06% interest rate and 2% inflation, your money will only be worth approximately $6,811 of today’s dollars in twenty years. (If you would like to check my math, this is the inflation calculator I used.)

So how much is the right amount of money to keep in a savings account?

It’s important to have some cash that is easily accessible so that you can get to that money quickly, just in case. But above a certain emergency fund threshold, you’ll find that your money is collecting dust (and losing value) in a savings account when it could be working for you.

That threshold will depend on the saver. Some people feel anxious without a fat savings account in case of emergency, and it is reasonable to work within your money psychology–provided you have a handle on retirement savings and other investment accounts.

If you are following the rule of thumb that you need three-to-six months’ worth of expenses set aside for an emergency, then having one-to-two months’ worth of expenses in a savings account can provide you with the funds you need–without damaging your ability to let your money grow.

Investments

If you have successfully put aside three-to-six months’ worth of expenses, then you’re probably looking at a too robust cash cache.

Having a large emergency fund in anything other than an investment means that your money is losing value. If you invest it wisely, however, your emergency fund can grow through the magical power of compound interest, making it worth far more than what you initially set aside.

On the other hand, investing your money also exposes it to the volatility of the market, which means it could potentially lose value. In addition, any money that you have invested will often be difficult to access quickly.

Check out: Personal Capital vs Mint: Which is Better for Understanding Your Investments

How Much Should You Invest?

If you have cash at home, a cushion of money in your checking account, and up to two months’ worth of expenses set aside in your savings account, then you are in a great position to invest the rest of your emergency fund.

Your cash on hand will get you through two or three months’ worth of expenses. This buffer will allow the remaining invested money to overcome any temporary dips in the market if you need to keep accessing your emergency fund.

PT’s take: “I’m a fan of keeping some of your emergency fund invested. We personally usually have a lot of cash sitting in checking accounts for short-term goals like taxes, Christmas gifts, and vacations. Therefore, we actually don’t feel like we need to have any of our emergency fund cash in our savings account. It’s all in Betterment. To make this happen automatically, I use Betterment’s SmartDeposit feature to automatically move money from my savings account to my Betterment taxable investing account after it reaches a certain threshold. That way I never keep too much money in cash at any one time and we don’t have to remember to move it.”

A low-risk investment possibility is to open a Betterment Smart Saver account. The money in your Smart Saver account is invested in a low-risk bond portfolio, with 80% allocated into U.S. Short-Term Treasury Bonds (SHV), and the remaining 20% allocated into U.S. Short-Term Investment Grade Bonds (NEAR).

This means your Smart Saver money performance generally tracks prevailing federal interest rates, rather than being influenced by your bank’s circumstances. Currently, Betterment’s expected yield for their Smart Saver program is 2.18%, although you will only see 1.93% to 1.78% once you account for your 0.25% to 0.4% fee. These numbers aren’t fabulous if you think of this as a straight investment, but for a low-risk option with a better interest rate than your savings account, it’s a good place to stash your cash.

Since this is an investment, your money is not FDIC insured (although the Treasury Bonds are backed by the full faith and credit of the U.S. government, which is a darn good guarantee). It also takes 4-5 business days to transfer money from your Smart Saver account to your checking account, which means this account can be a good place for emergency money that you won’t ever need in a hurry.

Betterment Price: Betterment is an online financial advisor that uses technology to efficiently manage your money and help increase returns. Get Started Betterment We earn a commission if you click this link and make a purchase at no additional cost to you.

Related: The Best Robo Advisors

Bonds

Bonds are basically IOU’s. You’re purchasing someone’s debt (the government, a business, etc.). You’re loaning money to them and getting your money back plus interest at an appointment time. This is called the maturity date. Bonds have fixed terms, usually between one and 30 years. 

If you want to invest, but are conservative, bonds offer more security than stocks. They won’t yield as big a return most likely, but it’s a good way to slowly get started with investing. 

How much cash should I have in bonds? 

If you’re saving three to six months, investments like bonds should be the last part of your emergency fund that gets touched. That’s because your investment accounts are going to have the highest yield return if you don’t touch them. You can usually cash out bonds before the end of your term, but you’ll lose out on a bigger return. 

What types of bonds are there? 

There are several types of bonds you can purchase. Some of the more common ones include: 

U.S. Government bonds: Bonds issued by the federal government are also referred to as Treasury’s. They are backed by the US government and are considered the safest bond investment. are considered the safest investment.

Municipal bonds: Issued by state and local governments, they help fund public projects. That can include school constructions and public parks. are not subject to federal taxes. 

Corporate bonds: Bond issued by corporations are called corporate bonds. Often these bonds go to raise financing to expand business or fund ongoing operations. 

High-Yield bonds

Investors looking for better returns than offered on government bonds have turned to high-yield bonds. These are bonds issued by companies that don’t qualify for investment-grade ratings from credit rating agencies like S&P and Moody. Corporate bonds fall in this category. Companies have to pay higher interest rates to attract investors. High-Yield bonds are still considered a low-risk investment, but are riskier than other types of bonds. 

How to invest in bonds?

Bonds can be purchased in multiple ways depending on the type of bond. Government bonds can be purchased directly through the Treasury Direct website. Sometimes municipal bonds can be bought directly from municipalities. They can also be purchased from brokers and banks. You can also invest in bonds through bond exchange-traded funds (ETFs). Be sure to do your research before choosing to invest in any bonds.

Get Started in Bonds with Worthy Bonds

A great way to invest in high-yield bonds is through Worthy Bonds. They make loans to small businesses using money from bonds and then pass on some of the interest to investors. Worthy’s small business loans help companies build inventory and purchase financing.

Investors earn 5% annually on their money with Worthy Bonds. This isn’t going to fund your retirement, but it’s a greater return than savings accounts. You can start your investing for as little as $10. But if you were to throw $5,000 into Worthy Bonds, you would make $250 annually in passive income. You won’t come close to that with a savings account at your local bank.

Check out Worthy Bonds here

Worthy Bonds utilize round up spending to fund bonds. To set this up, you’ll connect a monitoring account. This could be a credit or debit card. Worthy Bonds tracks your transactions on that account and rounds up your purchases to the nearest dollar.

For example, if you bought a latte for $3.75, Worthy Bonds would track the 25 cents it would take to round up the purchase to $4. Once you hit $10 in rounded up spare change, Worthy Bonds would purchase a bond for you using a linked payment account

The bonds have a 36-month term, but you can cash out your money at any time. This is why this is a good option for part of your emergency fund. Your money is still accessible. 

There is a $100,000 limit on investments for accredited investors. Non-accredited investors can purchase bonds up to 10% of an individual’s annual income.

Another plus by investing in Worthy Bonds is that you are also helping small businesses grow. Ultimately, it’s the return on your investment that matters most, but it’s nice to know that your participation is helping entrepreneurs grow their businesses.

Worthy Bonds Make loans to small businesses and earn 5% on your money. Get started with as little as $10. Learn More Worthy Bonds We earn a commission if you click this link and make a purchase at no additional cost to you.

How Much to Set Aside and When

It can be tough to know where to start building your emergency fund. Here are some good rules of thumb for getting to a fully-funded emergency fund:

  • Create a Plan B budget. The primary reason for setting aside several months’ worth of expenses is to protect yourself against a job loss. It’s a good idea to figure out what the least amount you can live on is. But be reasonable, if you are unemployed you’ll still want your Netflix account. This information will allow you to keep less in savings.
  • Make contributions to your emergency fund a consistent line item in your budget. It’s easy to think of saving up for an emergency fund as a once-and-done activity. However, it should be a consistent part of your budget. You should also plan on adjusting the amount you set aside in your savings account as your expenses change.
  • Rebalance regularly. If you are consistently sending money to your emergency fund, then you will regularly see your low-interest accounts grow bigger than they need to be. Make sure you move money from savings to investing whenever your emergency fund outgrows your threshold.

How much you should have in savings and where you should keep it is a personal decision. Typically, it’s a good idea to have a few hundred dollars in cash in your home and two month’s worth of expenses in an easily accessible account. After that, you may want to look into investing the balance of your emergency fund to avoid losing out to inflation.

Do you invest any of your emergency fund?

How Much Cash to Keep in Savings

About Emily Guy Birken

Emily Guy Birken is a former English teacher and respected personal finance blogger. She lives in Milwaukee, Wisconsin with her engineer husband and two high-energy little boys. She has written four books: The Five Years Before You Retire, Choose Your Retirement, Making Social Security Work For You, and End Financial Stress Now. Emily's thoughts on parenting and life in general are found at The SAHMnambulist.

Comments

  1. Tim LifeForTheBetter says

    I personally split my emergency fund. Half for investing and half for an actual emergency. I am already maxing out my contributions so if I really needed to have cash on hand I could just stop contributing for a month or two after going through my emergency fund. After all, personal finance is personal!