How Much Money Should You Have in Your Savings Account?

A savings account is a good place to put money you don't need right away, but will in the future. To ensure you have enough money in your savings, it's best to get into the habit of adding to it every month.

However, as strange as it may sound, it is possible to overdo it. Just like you can run into issues if you don't have enough money in your savings account, there are also consequences to having too much in savings. Fortunately, it's fairly easy to figure out how much money you should have saved.

Here's how much money you should have in your savings account

Your savings account should have your emergency fund and money for upcoming expenses. The exact amount will depend on how large of an emergency fund you want and the expenses you have on the horizon.

The traditional recommendation on emergency funds is to save enough to cover three to six months of living expenses. If your essential living expenses are $4,000 per month, then aim for $12,000 to $24,000. You can save more if you want. Some experts recommend having as much as a 12-month emergency fund. Saving less than three months of expenses isn't recommended, because it may not be enough in an emergency.

Upcoming expenses include anything that falls outside of your everyday spending. Here are some common examples:

• Down payment on a home or vehicle
• Vehicle maintenance
• Traveling/going on vacation
• Holiday gifts for family and friends
• A wedding

Tip: Consider setting up sub-savings accounts for each savings goal you have. Many bank accounts let you create separate sub-accounts that are all part of your savings account. You could create sub-accounts and name them "Emergency fund," "Travel fund," "Home down payment," and so on.

Why you shouldn't save too much

The consequences of not saving enough are well documented. You may not have enough money for big expenses, which means you need to go into debt to pay for them. But why is it an issue to have too much money in your savings?

The problem here is that you could be investing that extra money and getting a much higher return. Some of the best savings accounts earn APYs of 4% or higher right now, which is very good. But the average stock market return is about 10% (before inflation) per year going back decades.

Imagine that you have $25,000 more in your savings than you really need there. Over the next 20 years, it earns an average of 3% per year. That's less than current savings account rates, but rates change. A few years ago, even high-yield savings accounts were earning less than 1%.

After 20 years at a 3% APY, your $25,000 would be worth $45,519. Now, let's say you had invested it instead and gotten a return of 8% per year. That's reasonable, based on historical averages. After 20 years, your $25,000 would be worth $123,070 -- a difference of $77,551!

An example of how to set up your savings

To put it all together, we can go over an example of how to figure out the amount you need in your savings. Let's say that:

• Your living expenses cost $4,000 per month, and you want a six-month emergency fund. Target: $24,000
• You plan to buy a $350,000 home and put at least 10% down. Target: $35,000
• You want to go on two weeks of vacation per year and expect to spend about $250 per day. Target: $3,500
• You spend about $1,500 per year on vehicle maintenance and registration fees. Target: $1,500
• You spend about $1,000 per year on holiday gifts. Target: $1,000

Based on those goals and expenses, you would need $65,000 total in your savings account. If you wanted to keep things more organized, you could follow that tip above about setting up sub-savings accounts. That way, you can track how much you have for each goal separately.

If you haven't hit your savings goals yet, transfer what you can to your savings each month until you do. Once you've reached your goals, you'll be better prepared for major expenses.