How Much is Enough? Savings.

How Much is Enough? Savings.

June 28, 2019

In This Article:

  • Brooding over a nest egg
  • Smart investors save with a purpose
  • How much is enough savings
  • How do you get enough savings
  • How do you keep enough savings

Years ago I had a friend who found out he owed a few thousand dollars in taxes. When I asked him if he had any way to pay the taxes, he told me about the over nine thousand dollars in his savings account, but that it was his nest egg put away in case he needed it.

I remember wondering, what’s a nest egg for if not to pay for unexpected needs?

My friend forgot the purpose of his nest egg. He started thinking about his savings account as a precious egg that needed protection. He was building money with no goal or particular reason. He was so focused on protecting the account balance that when a need came up he experienced a lot of stress - even though he had more than enough money to meet the need! 

Smart investors put their money to work for them. Savings balances are there for a reason, such as an emergency fund with a set dollar amount, or a savings fund for Christmas presents, vacation, or a new car. One of our goals is to help you sleep well at night. Let’s talk about how answering the question of how much is enough savings can help you experience more financial peace.

How much is enough savings

The first step is to decide how much you need in a “what if” account to feel comfortable (how much is enough). For some people this is one or two thousand dollars. For others it is three months’ salary. What’s important is that you decide how much for you is enough to have in cash and why - this will guard you from “just because” cash. 

The amount is a combination of real sense and gut feeling. Real sense considers practical financial risks by asking some questions:

  • Do we have enough cash in savings to basic needs that could come up, for example, to replace the brakes in our car or cars?
  • What home repairs could realistically need to draw from savings?
  • What is the likelihood of being unemployed, and how long would that realistically last? What would be the bare bones expenses for that time?
  • Are there any other realistic potential sudden expenses we could have?

Once you have a real sense of how much savings is enough, it’s time for a gut check. It’s the classic, “yes, but tell me how you feel about that.” If you had that practical number in savings would you sleep soundly or be worried about unplanned expenses? If you’d still worry, then you have to increase that number. For couples, we recommend a healthy discussion of why you each have the number that you do, but then compromising upward to whichever number is higher. If one partner is convinced to reduce their number they will still live in financial worry.

How do you get enough savings 

How much do you have now, and how can you grow your savings balance? The answer to the first part of the question is a simple look at your bank statement, but the second part of the question is elusive for most people. The answer is surprisingly simple: spend less than you earn. Sounds basic, but few people actually do it.

If you haven’t already, establish a budget. To grow your savings you can only do one or both of two options: spend less and/or earn more. Go through your budget and highlight all discretionary spending - yes, including your online subscriptions, cell phone plans, phone/cable/internet, and memberships. Small reductions in several categories can really add up over time.

Bonus Idea: Yard sale - It only sounds cheesy until you see your savings account balance spike up. Most people are surprised at how much excess they have that’s of value to someone else.

How do you keep enough savings

Once you have enough savings, how do you keep it? 

  1. Keep your budget: An easy way to eat into your established savings is to spend more than you earn. That’s a path to high-interest consumer debt that you don’t want crowding out your financial goals!
  2. Have a spigot: When you have enough in your savings account you can turn that budgeted amount toward another long-term goal such as saving for a new car, retirement, or kids college. Then if you need to dip into the emergency savings you can turn the spigot back toward rebuilding that account.

Would you benefit from a conversation about growing your savings, or meeting long-term financial goals? Contact us to setup a time to meet, we’re happy to help.