Most financial advisers or budgeting experts recommend that individuals and households keep enough money in liquid savings to form an adequate emergency fund. Keeping too little money creates liquidity problems, but keeping too much in a savings account puts you at risk of losing out to inflation.
How to Calculate for Your Emergency Fund
There is an old adage about keeping some money for a rainy day, when unexpected costs arise that you must deal with urgently. Modern advisers call this an emergency fund and recommend it as an important part of a healthy financial plan .
There are some rules of thumb to consider when making calculations as to the right amount of emergency savings. Calculate your necessarily monthly expenses, including costs associated with housing, food, health care, interest payments on debt and a small amount for personal expenses. If you have children or other dependents, keep those costs in
Your liquid savings funds should be sufficient to cover expenses for three to six months in case you lose your job or get hurt or sick and find yourself unable to bring in revenue. If you are self-employed, have variable income or you might experience other interruptions to a steady budget, carry more than three to six months' expenses in your savings account.
Advantages and Disadvantages of Your Savings Account
Savings accounts are extremely liquid, generally only trailing checking accounts and personal cash holdings in that department. Since they tend to earn more interest than checking accounts, they are an excellent option for stashing emergency funds.
However, the average rate of interest paid on savings accounts is typically far lower than the rate of inflation in the economy. This makes them ill-suited for holding large sums of money that you aren't likely to need quick access to.
Category: Personal Finance