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A reader from Bhopal asks,
One basic question that has persisted with me ever since I started earning was how much money should you normally keep in your savings bank account? I mean what is the thumb rule or the threshold above which the money should be invested or siphoned. I would be thankful to you if you are able to guide me on this.
An excellent question. One for which there are many answers depending upon how financially disciplined you are.
But to begin with, let’s look at some possible scenarios where you’d typically need to have money available in your savings account –
- Money that you’d need in case of day-to-day emergencies.
- Money that you’d need for expected/planned short-term expenses (purchases within the next couple of months, some upcoming annual bills, etc.).
- Money that you’d need for “short-term opportunistic investments” — if you’re into that sort of thing.
So, in a worst-case situation, you’d need to have as much money available in your savings account as is needed by you to cover the above situations. That’s one side of the equation where you believe that you always need to have “withdraw-able hard cash” to cover these situations, in which case your savings account would have a fat balance. On the other side, you can pretty much tide over most of these situations if you simply have access to a “credit card,” in which case your savings account can be pretty lean.
So, the answer to the reader’s questions is — “It depends on your personal approach to managing your personal finances.” And where there is a “depends,” there cannot be a rule of thumb.
The same answer applies even if you’re only talking about an “emergency fund.” You cannot have a general rule of thumb for the size of your emergency fund. I believe this conclusion comes about from two posts that I’d written earlier this year — the first: a simple framework for managing personal finance risks and the second: emergency funds and where to save or invest them. The two posts in isolation would lead you to believe that there is a general rule of thumb when actually there isn’t.
But place the two together and several interesting perspectives and insights arise –
For example — If you have several passive sources of income, you’d laugh at the very mention or notion of an emergency fund. Then, if both you and your spouse are employed, one person can very well tide things over until things return to normalcy. But if you don’t have a Plan B, then you’d better well have a fat balance lying around in your savings account.
So, ultimately, the answer to the reader’s question is — “As much as would let you sleep peacefully at night.”
What do you think?
Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.