How Much Do You Need in Savings (No, not retirement, we covered that last week)

Everywhere you turn, people are telling you to save more. Save more for college, a rainy day, retirement, emergencies, general savings, for vacations, for gifts, for your heirs. It’s overwhelming especially if you bother to even use the millions of online calculators to help you figure out how much to save. Once you start seeing six figures, you give up…

Okay, kidding aside, what do normal people need to save to have a normal life? Here are some basic rules of thumb. I have to say this: these are general rules of thumb only, every person is different and your specific situation may preclude you from using one of these handy rules of thumb.

First let’s list a few things that would mean you probably need to save MORE than the rules of thumb. It’s not an exhaustive list, there may be other reasons not mentioned here:

  • You have a child who will never be economically independent
  • You or one of your family, have a disabling disease, condition or injury
  • You cannot get disability insurance (e.g. stay at home parent or freelancer)
  • You have an enormous amount (six figures) of debt (e.g. student loans, IRS, credit cards)

If you did not tick ANY of the boxes listed above, the following savings rules of thumb should give you good guidance until you can see a financial planner like myself who will assess all your details and do an analysis specific to your situation.

  1. Have a Rainy Day Fund for car repairs, root canals, home repairs, etc.
    • $1,000 if you are single and rent your home
    • $3,000-$5,000 if you have kids and a mortgage ($5,000 if you seem to live under a cloud and more than your share of rain falls on your household)
  2. Have Emergency Savings for CATASTROPHES (e.g. job loss, disabling injury/illness, floods)
    • Have 3 – 6 times your MONTHLY EMERGENCY EXPENSES
    • Your monthly emergency expenses are 75-80% of your typical monthly expenses
    • If your household spends $9,000/month now, the day you lose your job, you should be able to cut cable, cancel the gym, etc. and get down to about 80% or $7200.
    • If you have good long-term disability, if you are highly employable (e.g. HTML coder) you can have 3 months, otherwise be on the higher end of the range.
    • In our example, I would want the person to have between $21,600-$43,200 saved in cash, money markets or short-term CDs/bonds that you can get to within a few days.
    • You cannot keep this money as equity in your beach house or main residence because you cannot liquidate it quickly enough without risk of loss.

Remember, this is the MINIMUM you should have as LIQUID savings, which is in a money market, savings account or an account that you can ACCESS IMMEDIATELY with NO PENALTY OR RISK OF REDEEMING OR WITHDRAWING. Any additional savings can and should be managed with return/growth as the priority. Yes, stocks, beach houses, art… that’s for another post.