If you’re a regular reader of our blog you know that we don’t like to give fixed numbers for anything. Is $1 Million enough to retire? Probably not, but maybe, depending on your lifestyle. Should you max out your retirement contributions every year? Sure, if you have all your other financial #goals maxed out too. But if you’re saving for retirement at the cost of saving for everything else, then no.
Financial advice isn’t one size fits all, and anyone who gives you a fixed number for how much money all Millennials should have for anything is selling you short. So when people ask us how much money they should keep in the bank, it shouldn’t surprise you that we aren’t going to give you a single number and be done with it.
First, let’s look at all the places you should be keeping your money that aren’t your checking account and how much should be in each account. The key to making sure you are allocating your money correctly is automation. If you’ve been reading along on a regular basis, you know how obsessed with are with automating your savings, and for good reason!
If you don’t believe us (um, ouch!), then listen to a behavioral economist. Shlomo Benartzi was quoted in Business Insider last year saying “If people have to actively think about saving, then they probably won’t do it,” as part of his argument for automating your savings. We also talk at length about why automation can help us avoid becoming our own worst enemies in our blog I Swear I’m Cutting Back — Where’s My Savings?
So now that you know that you need to automate, here are the types of savings you need to automate for:
Yes, you absolutely need an Emergency Fund. This is often what H.E.N.R.Y.s™ think of when they say “cash in the bank.” But they aren’t really the same thing. Your Emergency Fund is just that, a fund for emergencies. It is not the money you are using on a regular basis. It’s not how you’re paying off your credit card or funding your trip to Cabo. It’s how you survive an unexpected job transition, illness, or other unforeseen life circumstances. And no, your spiritual renewal in Tulum this winter does not qualify as a life circumstance (unless it does, we don’t know your life and we aren’t here to judge).
Here’s our take: CDs and Money Market accounts are B.O.G.U.S.!
Unlike most financial pros, we don’t believe in the $10K Emergency Fund, or the 6-12 Month Emergency Fund. Instead, you should have no more than 3 months worth of fixed expenses saved. 6-12 months is just way too much, that money could be put to use toward your short-term goals, and $10K is just a random number that might be relevant for your fixed expenses, and might not.
Real talk: Cash can only do so much sitting in the bank, even a great online bank with a high interest rate, which is where we always recommend keeping your Emergency Fund (we like Ally and Marcus). Even the best online banks aren’t going to beat inflation in the long-run. Which is why high-yield savings accounts are great, but can only go so far.
Important Note: Your Emergency Fund isn’t something you need to keep adding to unless your fixed expenses change. This is a primary goal you should work toward, and once you hit it, stop adding to it and start saving towards other goals. Check in on this number once a year. No more. No less.
Short-term and Medium-term Goals
Short term goals are anything you want to do in the next 1-3 years. This is your trip to Ireland, buying an engagement ring, or a down payment for a house. If it costs a chunk of change and is happening in the next 3 years, it’s a short-term goal.
Remember those online savings accounts we mentioned? Open a few more, give each a nickname that corresponds to each goal, and automate, automate, automate. This is money you need to use soon. There’s little margin of error here. You don’t want to take on any risk with this money. It stays in cash! Just so no to investing your short-term goal money. A high-yield savings account is your best friend to keep this money handy, but growing at least a little bit.
Medium-term goals are anything you want to do more than 3 years from now, but before retirement. These goals might include buying a house, getting married
There is a fluidity between short and medium-term goals, and these will vary from person-to-person and throughout your life. People generally have fewer medium-term goals because most of us don’t have fixed plans that far out, so this money is the money you can invest in more liquid option than your retirement account.
We know, we got a bit jargony there, so let us break it down. When you think of saving for your goals you may immediately think of CDs (Certificates of Deposit) and Money Market accounts. Big banks certainly make us think this is where we should put our money for things like a wedding or a house. Here’s our take: CDs and Money Market accounts are B.O.G.U.S.!
The interest rates on Money Market accounts and CDs aren’t that different, and frankly, we just aren’t convinced that you should put your money in one. And often these accounts come with stipulations like $10K or even $25K minimums. NOPE! Stay far away from any account that is loaded with minimum balances or time that the money needs to be invested.
If you’ve got more than a $3K cushion sitting around in your checking account, check yourself.
If your goals really are more than three years out, that money can be invested in the stock market, which you can also automate. This is money you are putting in stocks, bonds, ETFs or mutual funds, but that isn’t funding your retirement account. This means you can sell at any time without penalty when you need that money to fund your goal. Having money invested that isn’t your retirement account keeps your money growing in the market without being hit with extra taxes like you are when you withdraw from a retirement account early.
Note: There are tax implications to investing, so make sure you do your research and/or talk with a financial advisor as you begin your investing journey.
We have tons of articles about saving and investing for retirement, so we aren’t going to spend too much time on it here, but we need to make a very important point. Your retirement account should not be in a CD or Money Market account. Those accounts will not keep up with inflation and you will lose the benefits of having your money in the market for the long term.
So now that you have an Emergency Fund, are automating your savings for short and medium-term goals and are saving for retirement, how much cash should you actually have in your checking account?
This is the money you are using to pay your month-to-month expenses. AKA this is the money you are keeping in a checking account. This amount should be based on your fixed expenses (rent, utilities, groceries) and how much you have left over for the fun stuff (date night, movies, theater tickets, weekend trips). We’re realistic and know this number is not fixed, our expenses change from month to month, which is why we recommend automating your savings and then keeping the leftovers from each pay period in a checking account to pay for the day-to-day, month-to-month expenses of being a modern human.
You may have realized by now that when you automate for all of your other goals, you don’t have enough left over to pay the bills. OUCH. This is a huge reality check for many of our clients and means you really need to go back to the drawing board and make sure you are living a lifestyle you can afford and aren’t a victim of lifestyle creep.
And here’s the closest we will get to a fixed number: For most H.E.N.R.Y.s™ , we recommend keeping no more than a $2-3K cushion in your checking account. This accounts for paychecks and bills hitting your account at different times. This helps to make sure you never get caught off guard. If you’ve got more than a $3K cushion sitting around in your checking account, check yourself. This extra money needs to be assigned to a short-term goal, or working harder for a mid or long-term goal. Or, upgrade your lifestyle a bit and blow it, guilt free!
Do you see why we couldn’t just give you a number and be done with it? The amount of money you have in the bank is entirely dependent on your life circumstances. It takes some work to figure it out, and it also takes some trial and error. We aren’t always going to be perfect with our finances, even those of us who make our living in the finance world. We are human, which is why we love tools like automation to make it easier.